Tax Credits

Tax Credits

With significant savings to the Welfare Budget required, substantial changes to the Tax Credits and Universal Credits system have been announced. The Chancellor announced that the changes shown below should reduce the amount of people who qualify for Tax Credits from the current level of 9 out of 10 families, down to 5 out of 10.

  • From April 2016, the first income threshold will be reduced from £6,420 to £3,850 per year. This means a claimant’s tax credits award will be reduced when their income exceeds £3,850.
  • Work allowances in Universal Credit will be abolished for non-disabled childless claimants, and reduced to £192 per month for those without housing costs and £397 per month for those without housing costs.
  • The taper rate in tax credits will be increased from 41% to 48% of gross income with effect from April 2016. Once a claimant earns above the threshold of £3,850, their award will be withdrawn at a rate of 48 pence for every £1 of income.
  • The Child Element (currently worth £2,780 per annum) will no longer be awarded for third and subsequent children born after April 2017. This will also apply to families claiming Universal Credit for the first time after April 2017. Existing claims will be protected, if there is an interruption of less than 6 months.
  • Furthermore, children with disabilities will continue receive the Disabled Child Element, and multiple births will also be protected.
  • Tax Credits are reduced when income rises. Currently if income rises by less than £5,000 tax credits are not affected, but from April 2016, the income disregard will be reduced to £2,500. The income disregard is the amount by which a claimant’s income can increase compared to the previous year without their award being adjusted.
  • As from April 2017, the Family Element of Tax Credits, and the equivalent in Universal Credit, will no longer be awarded when a first child is born. This will also apply to families with children making their first claim for Universal Credit.

The Government has also announced it will improve its powers to recover Tax Credit debts. They will make the recovery of Tax Credits debts more efficient by recovering overpayments of Working Tax Credits from Child Tax Credit, and vice versa.

They will also expand the use of the private sector to improve the collection of debt, targeting debts of over £3,000.

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