Tax credit changes: How are families affected?

Money Talk by Victoria Todd
Low Incomes Tax Reform Group (LITRG)

Image caption,
Childcare is one factor considered by the tax credits system

The Spending Review in October saw the government announce further changes to the tax credit system, in addition to those in the June Budget.

The changes announced in June were aimed at reducing the entitlement of higher-income claimants.

The measures announced in October seemed to put the squeeze more on those with lower incomes.

So how will they affect you?


The first of the changes announced in the June Budget will come into effect in April 2011. Tax credits will reduce faster as income rises.

At present, once claimants' income reaches a certain threshold, their tax credits are withdrawn by 39p for every pound that their income exceeds that threshold.

The thresholds are £6,420 a year for those receiving both working tax credit and child tax credit and £16,190 for those receiving only child tax credit.

From April 2011, this "taper" will increase to 41p in the pound, so tax credits will disappear more quickly for people on modest and higher incomes.

The family element, currently guaranteed at £545 if annual income is £50,000 or less, will start to reduce by 41p for every £1 when income reaches £40,000.

At present, if you have a sudden rise in income of up to £25,000 as compared to your previous year's income - for example by going from part-time work to full-time work - then the current year's tax credit claim is generally unaffected. This is known as the income disregard.

Image caption,
Victoria Todd says that a universal credit will need careful planning

This prevents some people getting a retrospective bill to repay overpayments.

From April, this earnings disregard threshold will be reduced from £25,000 to £10,000.

Balancing these downward changes in the June Budget was the announcement that payments made for each child - the child element of child tax credit - will be increased by £150 above indexation from April 2011. It will then rise by a further £60 from April 2012.

Recently Chancellor George Osborne announced further above-indexation increases to the child element of £30 from April 2011 and £50 from April 2012 - in total, £180 above indexation next year, and another £110 the year after.

Three other tax credit changes were announced in the Spending Review, all of which are likely to result in lower awards.

It seems odd that when the government wishes to make work pay, spending cuts are targeted on working tax credit which is specifically designed as a work incentive.


Currently, families who qualify for help with childcare costs can get up to 80% of their childcare costs met if they use registered or approved childcare.

But from April 2011, eligible families will only be able to claim up to 70% of their eligible childcare costs.

Thus, families who receive help with their childcare costs will have to find an additional 10% of the costs themselves.

In addition, those who receive childcare vouchers or those who turned down childcare vouchers to claim the childcare element of working tax credit will need to revisit their decision.

For example, a family with two adults and two children, working more than 30 hours, earning the average wage of £25,000 a year, with childcare costs of £150 per week, will receive tax credits of around:

  • £8,738.80 in 2010-11 (current year);
  • £8,157.20 in 2011-12 taking account of the rise in each child element by £180, the increase in reduction taper to 41%, the reduction in childcare costs from 80% to 70%, the freeze on basic working tax credit and 30-hour elements and an estimated Consumer Price Index of 3.1%;
  • £8,602.20 in 2012-13 taking account of the further rise in each child element of £110.

The fall that this family face in 2011-2012 is due to the decrease in childcare support and in the increased taper which means tax credits are taken away faster as income rises.

The loss suffered by these changes would have been greater had it not been partially offset by the above indexation increases in the child element of child tax credit.


Each year, benefits and tax credit rates have hitherto been increased.

Previously this was based on the Retail Prices Index measure of inflation but, from April 2011, this will be based on the less generous Consumer Prices Index.

Child benefit has already been frozen for three years.

From April 2011, the basic element of working tax credit - which everyone who is entitled to working tax credit receives - and the 30-hour element will also be frozen at their current levels.

Major change

The biggest change is for couples with children who can currently get working tax credit if at least one partner works at least 16 hours a week.

From April 2012, such couples will have to work at least 24 hours a week, with one partner working at least 16 hours.

A family with two adults and two children, where one adult works 22.5 hours earning £10,000, will receive around:

  • £7,558 in 2010-11
  • £8,057 in 2011-12
  • £6,035 in 2012-13

They will lose working tax credit of around £2,500 from April 2012 because the family no longer qualifies for it, although this will be partially compensated by the above-indexation increase in child tax credit.

This loss may be reduced by interactions with other means-tested benefits such as housing benefit and council tax benefit.

At present, the detail of this change has not been released.

As well as families losing the normal elements of working tax credit - and in some cases child tax credit - if they do not work enough hours under the new rules, it is not clear what will happen to those families who claim childcare costs where one partner has a disability and the other works, say, 20 hours.

Often in this scenario, the family needs childcare as the working adult is required to spend their non-work time caring for the disabled adult and is often unable to fulfil childcare responsibilities.

Under the present rules, they qualify for help with childcare.

But, as the childcare element is part of working tax credit, there is a risk that this access to childcare will be lost unless an exception to the new rule is introduced.


Of course, the biggest announcement of all is that the go-ahead has been given for the introduction of universal credit.

This will replace most current means-tested benefits and tax credits with a single payment that the government say will "ensure work always pays".

Further detail about the universal credit is expected over the coming weeks.

It will need careful thought and preparation to achieve its main objective of making work pay.

For now, in the short term at least, it seems that some of the latest cuts may achieve the opposite effect.

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