Budget July 2015 – Changes to Tax Credits

Budget July 2015 – Changes to Tax Credits

In the budget on July 9th George Osborne announced 9 billion pounds worth of cuts to the tax credit system. Many of the changes are due to come into effect in 2016. Tax credits are hugely important to many separating and divorcing people, so we thought it would be helpful to look at where the cuts are going to fall.

Tax Credit Rates are being frozen for four years. In addition parts of the payments are being scrapped, thresholds are changing to reduce the amount some people can claim and the ‘Child Element’ in tax credits is being limited to two children.

We’ve identified 4 major changes for people currently receiving Working Tax Credit and Child Tax Credit.

What the changes mean is complicated so we’ve included some examples to help clarify.

  1. Income threshold reduction

From April 2016 the income threshold for claiming will go down from £6,420 to £3,850, meaning that far fewer people will be eligible to claim. And anyone earning more than £3,850 will now have their tax credit income reduced.

  1. Taper rates increased

Tax credit income for those earning over the threshold will also be reduced more steeply from April 2016. The taper rate will increase from 41p per pound to 48p per pound. This means once a claimant earns more than the income threshold for tax credits their award will be withdrawn at a rate of 48 pence for every pound earned.

For example someone earning £12 000, working 30 hours, with 2 children.

Old Tax Credit:

£12 000 (wage) – £6 420 (threshold) = £5 580

£5 580 X 41p = £2 287.80

Total possible entitlement (made up of WTC Basic element and WTC 30 hours element) = £2 770

WTC Received: £2 770 – £2 287.80 = £482.20

New Tax Credits (from April 2016):

£12 000 (wage) – £3 850 (threshold) = £8 150

£8 150 X 48p = £3 912

This puts her above the £2 770 possible entitlement for Working Tax Credit so she will not get anything.

Previously claimants’ income could rise without their tax credits being affected by £5,000 a year. This was known as the income rise disregard. That disregard will now be cut to £2,500.

  1. The Basic Family Element of Working Tax Credit will also disappear from April 2017

In the example given above of a single parent of two children, working 30 hours a week for £12 000 she would have got £545 as the Basic Family Element of Working Tax Credit. From April 2017 this will stop. Households who have been in receipt of tax credits with an interruption of less than 6 months will be protected from this change. Children with disabilities will continue to receive the Disabled Child Element or Severely Disable Child Element

  1. Child Element Limited

Child Tax Credit can currently add up to £2,780 a year per child

Parents who have a third child after April 2017 will only be able to claim child tax credits for their first two children. Parents who have been receiving tax credits for 3 or more children before 2017 without interruption will continue to receive tax credits for their children as before.

Tax Credits are due to be replaced by Universal Credit. Transitional arrangements started in 2014. The date for the full switch over was originally supposed to be 2017, but it is likely this will be delayed.

To calculate your eligibility for Tax Credits – go to the calculator on the Turn2us website.