A number of changes to working tax credits and child tax credits were announced in the Summer Budget and we have summarised these for you.

Following the House of Lords' rejection of the government proposals, we can expect some changes in the Autumn statement, and possibly the introduction of transitional arrangements to lessen their immediate impact.

What's new:

In the Autumn statement all of the proposed changes were withdrawn except for the reduction of the income disregard from £5,000 to £2,500.

See Autumn Statement 2015: Tax Credit U-Turn

At a glance:

Working Tax Credit (WTC)

  • This is paid to employees, or self-employed people, who work at least 16 hours per week.
  • You don't have to have children to qualify.
  • It is made up of a number of elements, including basic, lone parent, disability, and childcare elements. 

Child Tax Credit (CTC)

  • This is paid to individuals who have at least one child.
  • You don't have to be in work to qualify.
  • This is paid in addition to child benefit.
  • It is made up of a number of elements, including standard, disability and family elements.

What's new?

From April 2016:

  • Threshold for WTC claims falls from £6,420 to £3,850.
  • Threshold for CTC claims falls from £16,105 to £12,125.
  • Threshold for combined WTC and CTC claims falls from £6,420 to £3,850.
  • The rate at which tax credits are reduced above these thresholds increases from 41p per £1 to 48p per £1.
  • WTC and CTC will be frozen for four years (except for disability elements).
  • The income disregard (amount which current year income can be higher than the previous year without affecting the tax credit payment) falls from £5,000 to £2,500.
  • The maximum rate at which overpayments can be recovered increases from 25% to 50%.

From April 2017:

  • The standard element of CTC is limited to two children where the third child is born on or after 6 April 2017.
  • The extra amounts for disabled children are expected to remain payable for additional children.
  • The family element of CTC is to be removed for those starting a family on or after 6 April 2017.

What effect will these changes have?

  • It is clear that almost everyone who is in receipt of some form of tax credit will be worse off from 6 April 2016.
  • Even those with income that is below the new income thresholds will be affected by the freeze on all elements except for disability.  
  • Claimants' eligibility to receive free school meals for their children may also be affected as that eligibility is linked to tax credit awards. 
  • Some claimants might benefit from an increase in the living wage, however much of any salary increase is likely to be clawed back as the thresholds fall and the rate of withdrawal increases. Where the salary increase is within the income disregard the full effect of this will be delayed until April 2017.
  • Some claimants might benefit from additional housing benefit if their income is extremely low.

Some examples:

These examples are from a report by the Low Incomes Tax Reform Group (LITRG).

Krysten is a lone parent with two children. She works 30 hours per week, has a salary of £18,000 and has childcare costs of £150 per week. Her tax credit award will fall by about £2,050 in 2016/17 as a result of the fall in the income threshold and the increase in the rate of withdrawal.

Bridget's earnings for 2015/16 were £15,000. She is promoted in April 2016 and her salary increases to £19,000. When the income disregard was £5,000 her tax credit award for 2016/17 would be based on her 2015/16 income of £15,000 with her award for 2017/18 being reduced. However, now that the disregard has fallen to £2,500 her award for 2016/17 will be based on £16,500 (£19,000 less £2,500) so she will see a reduction sooner.

Gita and David have two children. Their third child is born on 6 April 2017. Under the current rules they would have expected their tax credit award to increase by £2,780, which is the standard rate per child. However, under the new rules no additional credit is given for the third child.

Universal Tax Credit:

  • The WTC and CTC will be rolled into the new Universal Tax Credit (UTC). 
  • Some claimants have been moved to UTC already, with pilots beginning in April 2013.
  • WTC and CTC will continue to be phased out in 2016/17 with most claimants having moved to UTC by the end of 2019.