Hundreds of thousands of people will be hit by reductions to tax credits as a result of changes from April. According to the Treasury, it is estimated that 800,000 people will see their entitlement to tax credits reduced due to a cut to the income rise disregard. This could cost affected households an average of £200 to £300 a year.
Last autumn, the Chancellor cancelled most of his plans to cut tax credits for millions of low paid workers, but a measure reducing the amount by which a claimant's income can increase within a year before their claim is affected will go ahead.
Under the changes, people will have their tax credits cut sooner when their employment income rises by more than £2,500 in a year, reducing the incentive to take on extra work or responsibilities, and raising the risk of overpayments. Currently a claimant's income can rise by £5,000 within the year, without having to recalculate and pay tax credits back.
The Guardian newspaper reported that details of the numbers affected by the cut had only emerged because the Treasury was forced to give data to a House of Lords Committee examining the draft legislation. The Committee had highlighted the absence of any impact assessment and demanded to know how many people would be affected by the proposed change and what would be the likely financial impact on those people.
Shadow Chancellor's comment
Shadow Chancellor John McDonnell plans to ask the Commons Speaker John Bercow to summon a Treasury minister to answer questions about the cut, due to come into force in April. He said: “It is completely shameful when you consider that 800,000 working people, almost the equivalent of a city, face losing money when the Tories are cutting taxes for a wealthy few.”
‘A matter of fairness’
A Treasury spokeswoman said: “It is a simple matter of fairness and common sense that tax credit awards are reviewed as people’s incomes change. It isn’t right that someone earning significantly more should do just as well in terms of tax credits than someone earning less.”
“Lowering the maximum annual pay rise that is disregarded to £2,500 will simply return the system to the same level as when tax credits were first introduced. By definition there will be no losers because people’s increase in income will out strip any reduction to their tax credit reward.”
Our website has information on Working Tax Credit and Child Tax Credit that you may find useful.
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Source: Guardian news article: Tax credit cuts that escaped Osborne's U-turn to hit 800,000 workers