Crash Bang Wallop indeed! IncomeMAX looked on in fascination today as the Chancellor of the Exchequer George Osborne announced plans to make serious cuts to benefits and tax credits payments in order to find £11 billion worth of welfare saving.
So, what exactly are the plans? And what will this mean for the great British public?
Families with children are the hardest hit in the proposed reforms. Child Tax Credit and Working Tax Credits are to be completely reformed, with a number of changes made. But there are lots of other changes affecting disabled people, lone parents, pensioners, jobseekers and those requiring support for rent/housing costs.
Here are the main changes:
People claiming Tax Credits
- The second income threshold currently used to calculate and award the family element of Child Tax Credit (presently £545 per year) for higher earners will reduce from £50,000 per year to £40,000 from April 2011. Then in April 2012, the family element of Child Tax Credit will be withdrawn immediately after the child element(s) when calculating tax credit entitlement (so the £40,000 limit should in effect only last for one year basically – after that the family element will be subject to the same tapering rules as all the other Child and Working Tax Credit elements).
- The family element will also now taper away using the new universal Tax Credit withdrawal rate of 41% (increased from 39% currently) from April 2011.
- The Child Tax Credit baby element (currently £545 per year) which is paid when children are under one will no longer exist from April 2011.
- Within Working Tax Credit, the 50 plus element will be removed from April 2012.
- At present, HMRC use an income disregard of £25,000 when calculating entitlement to tax credits (meaning they can ignore income increases of up to £25,000 from the current tax years’ income when calculating your entitlement). This disregard will be lowered to £10,000 for two years from April 2011 and then to £5,000 from April 2013. This could mean a return to the bad old days of Tax Credits overpayments (which the £25,000 disregard was designed to eradicate).
- The government also plan to introduce an income disregard of £2,500 for falls in income from April 2012. I must be honest and say I’m not 100% on what this actually means. My worry is that it could mean that if your income falls by up to £2,500 HMRC will not adjust your Tax Credits payments. This is something of a concern but we’ll need to see more detail on this before we can comment further.
- The backdating of Tax Credits will be reduced from 3 months to 1 month from April 2012.
- Some good news for low income families with children – Child Tax Credit will see an increase of the child element (currently £2300 per child) by £150 in April 2011 and £60 in April 2012 above CPI indexation.
Child Benefit
- Child Benefit, which is universal and NOT MEANS-TESTED will be frozen for three years from April 2011. So you can expect to receive £20.30 for your first or only child and £13.40 for each other child for a while!
Pensioners
- The Basic State Pension will be uprated by a triple guarantee of earnings, prices or 2.5 per cent, whichever is highest, from April 2011.
- Pension Credit guarantee credit will match the basic State Pension cash increase in April 2011.
- From April 2011 people aged over 60 will qualify for Working Tax Credit if they work for at least 16 hours a week.
Saving even more dosh on the benefits bill – using CPI not RPI
- For many years now the government has mainly used something called the Retail Price Index (RPI) to increase the levels of certain benefits. The government will now switch to using Consumer Price Index from April 2011.
- This SHOULD mean that many benefit payments will not rise as much each year, therefore saving the government even more money in the long-term.
- Richard Exell, the TUC’s Senior Policy Officer has written a very interesting blog on the subject of using CPI to uprate benefits, and so has his colleague Nigel Stanley, the TUC’s Head of Campaigns and Communications.
Disabled people
- Disability Living Allowance will be reformed to introduce the use of medical assessments for all DLA claimants from April 2013.
Lone Parents
- Income Support for Lone parents will see an extension to the conditionality rules for those with children aged 5 and above from October 2011. This basically means that many lone parents will need to sign on as Jobseekers and look for full-time work once their youngest child is aged 5 and over.
Expectant Mums
- The £190 Health in Pregnancy Grant is to be abolished
- The £500 Sure Start Maternity Grant will only be able to be claimed for your first child (or children where the first is a multiple birth) from April 2011.
Housing
- Support for Mortgage Interest within certain means-tested benefits will be set at a level equal to the Bank of England’s published monthly Average Mortgage Rate from October 2010.
- From October 2011 the Local Housing Allowance will be set at the 30th percentile of local rents.
- Local Housing Allowance rates will be uprated in line with the CPI from April 2013.
- Deductions made on certain benefits for non-dependents living with you will be uprated in April 2011.
- Housing Benefit will be reduced to 90 per cent of the initial award after 12 months for claimants receiving Jobseekers Allowance from April 2013.
- From April 2011 Housing Benefit claimants with a disability and a non-resident carer will be entitled to funding for an extra bedroom.
- From April 2011, Local Housing Allowance rates will be capped at:
- £250 per week for a one bedroom property
- £290 per week for a two bedroom property
- £340 per week for a three bedroom property
- £400 per week for four bedrooms or more
- Funding for Discretionary Housing Payments, where Housing and Council Tax claimants can access additional help for rent and council tax not already covered by Housing & Council Tax Benefit will be increased by £10 million in April 2011 and then by £40 million in each year from 2012/2013.
Saving Gateway
- The Saving Gateway, a scheme to help low income families save will no longer be introduced in July 2010.
Family Financial Health Check
- The Government has asked the Consumer Financial Education Body (CFEB) to develop a new annual family financial healthcheck. This will be introduced in spring 2011 as part of a national financial advice service.
IncomeMAX comment
It is certainly a bold budget and one that sets out a clear message on Tax Credits. The Government clearly wants the tax credits system to support only lower income families, rather than both lower and higher income families as has been the case.
The Government clearly believe that Tax reform is the way forward, wanting to put money in peoples pockets before they start to pay tax, instead of paying tax and then claiming tax credits, which when you think about it does make more sense.
Many of the usual client groups are targeted, and disabled people will rightly be worried that they could get caught up in the new medical assessments for DLA and, as previously announced, Incapacity Benefit and that they will lose benefits as a result.
Lone Parents have long been targeted and the change to Income Support rules for Lone Parents have been gradually coming in for a while now. In our experience the majority of Lone Parents have no real problems claiming Jobseekers Allowance and want to be in full-time work. But don’t forget the difficulties that lone parents often face in finding work that is flexible with hours and also finding (and funding) suitable childcare.
This budget, in my opinion, is a definite move towards making the majority of the public fend for themselves.
The Government clearly wants us to be more responsible for our own lives and our own finances, whilst still having a benefits and tax credits system that supports people less able to support themselves.
Many will welcome the proposed changes but what is evident is that the system, for the next few years at least, will remain complex and difficult to navigate. That is why good benefits advice will be as important as ever for those needing to access and make sense of the benefits and tax credits system.
It was also brought too my attention that how much would the value of benefits be worth if the Government are going to calculate them on CPI Rather than RPI. However, is there any way of calculating TAX Credits? Currently I am claiming around 3000 pounds a year but its based on RPI how much would this be worth if it was measured on CPI?
Secondly, forgive me for my ignorance, but I’m not quite sure what you mean in the 5th bullet point under the ‘People Claiming Tax Credits’ What do you mean by tax disregard? I’m currently earning 13,000GBP gross so if in 2013 I earn 14,000GBP will this affect anything?
Hi Tom, thanks for your comments.
The Direct Gov website states that “Benefits and tax credits will be worked out using the Consumer Prices Index (CPI) instead of the Retail Prices Index (RPI) from April 2011. The CPI and the RPI are used by government and economists to work out how much prices increase each year. The CPI is usually lower than RPI as the CPI doesn’t count housing costs”
So Tax Credits should be uprated using CPI from now on, meaning slightly lower increases each year, saving lots of money FOR THE GOVT in the long term.
If you are already on Tax Credits, HMRC will normally use LAST years taxable income to calculate THIS years entitlement, as long as this years income does not exceed £25,000 (therefore disregarding £25,000 worth of income). In your case, a rise to £14k from 13K would mean that next year, they would use £13k to calculate tax credits, the year after they would use £14k and so on. If income goes lower than last years income they can use THIS years income.
Lastly, if your income is higher this year than last year by MORE than the disregard amount, then this years income is used MINUS the disregarded income amount.
So what the govt are proposing is to lower the £25,000 disregard they currently apply to £10,000 and then later to £5000.
This could mean a return to overpayments. Here is an example of how that might happen using the £5000 disregard:
“A customer claims Tax Credits after being on Income Support for the last few years. Customer is now working 16 hours. The whole of the last years taxable income is ignored (Income Support is not taxable) so customer gets full tax credits for the year.
The next year, customer re-claims tax credits based on the fact that last year they earned £13,000. This year, they expect to earn £14,000, but that is only £1000 over £13,000, so £1000 is disregarded and £13,000 is still used in the tax credit calculation.
Half way through the year, customer gets a pay rise and does lots of overtime. When the customer gets their P60 at the end of the year, they actually earned £21,000, not £14,000 as they thought.
HMRC carry out a consolidation at the end of the tax year. The income they should have used is actually £16,000 (£21,000 minus £5000) and so there will be an overpayment of tax credits as HMRC have used £13,000 not £16,000 to base the customers tax credits payments on that year.
Can you see how the £25,000 disregard level pretty much eradicated the overpayments that occurred when tax credits first launched? Many of you will remember the misery that they caused as millions of people had spent money that was paid to them in good faith but actually the tax credits were incorrectly paid in the first place.
So the biggest danger of tax credits overpayments will be when the £5000 limit is introduced.
THE RULES ARE AS FOLLOWS:
* KEEP A TIGHT RECORD OF YOUR INCOME (BOTH CURRENT AND EXPECTED)
* KEEP YOUR P60′S SAFE – DO NOT THROW THEM AWAY
* REMEMBER THAT ALL YEARLY TAX CREDITS PAYMENTS ARE ESTIMATES! IT IS ONLY AT THE END OF THE YEAR YOU CAN REALLY KNOW WHAT YOUR CORRECT TAX CREDITS SHOULD HAVE BEEN
* ALWAYS INFORM HMRC OF CHANGES OF YOUR INCOME AND CIRCUMSTANCES. DO IT IN WRITING AND KEEP A COPY FOR YOUR OWN RECORDS
* SEEK URGENT ADVICE IF YOU ARE UNSURE IF YOUR TAX CREDITS ARE CORRECT OR IF YOU GET HIT WITH AN OVERPAYMENT
Thanks
Lee
IncomeMAX MD
THANK YOU VERY VERY MUCH LEEHEALY. I RELALLY APPRECIATE THAT.
The only thing left is how much of a difference would £3000 mean in CPI rather than that of RPI?
Cheers
The 25k rule as it stands actually encourages overpayment more than ever before… i have been on the receiving end. It basically gives the TCO permission NOT to decrease your payments where your income increases, but to continue to pay the same amount, and then claim back what they shouldnt have paid you at the end of the year. We had an income increase of 5k which we told them about in July, and which was reflected in our award notices (but payments remained, which I queried, but was ‘correct’), then got stung with a £1,250 overpayment at the end of the year. They didnt ament the payments because of the 25k rule. Systematic indicement of debt !!! Lowering the threshold can only mean the potential overpayment will be decreased for many.