Emergency Budget: Tax credits - how it bites

Rebecca Benneyworth offers a technical summary of the tax credits changes and how they apply.

There were cries of “shame” in the House when the chancellor gave the lowdown on tax credits for high earners. Known fairly widely in the tax profession, but possibly not to the general public, the combined impact of the £50,000 income limit for the family element of tax credit, and the income disregard of £25,000 per annum conspire to allow some people with income of up to £83,000 to claim tax credits.

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Comments

Tax Credits

steve marsland | | Permalink

Good article written by Rebecca but I would like to mention a couple of points and I am more than happy to be corrected as this is such an important area for our clients as in 2012/13 I can see our clients being the position whereby they end up being overpaid tax credits because of the reduction in the income disregard.

The first point is the calculations that Rebecca prepared for 2011/12.  Just a minor point, but the reduction is at 41% and not 39%.  Or should we read this as an effective tax rise of 2% for those receiving tax credits who are on very low incomes!!

Secondly, from my review of the budget notice headed 'Benefits and Tax Credits' (see link below) it would appear to indicate that from 6 April 2011 the second withdrawal rate, which currently is 6.67%, is being increased to 41%.  This would mean that the for those individuals entitled to the family element only of £545, their household income would only have to be £41,330 (£545/41% + £40,000) to lose out on tax credits altogether.

This notice also refers to the fact that from 6 April 2012 the tapering of the family element will begin immediately after the tapering of the child element which if I am reading it correctly means that a family with 1 child (currently entitled to a maximum tax credits of £7445 assuming no disabilities and child care etc) would lose all entitlement to tax credits at a household income of £24,578 (£7445/41% + £6420).  Can this be right or am I missing something!!!!!!!!!!!!

Please correct me if I have read the article incorrectly (www.hmrc.gov.uk/budget2010/bens-creds-all.pdf)

Steve Marsland 

 

 

Tax credits

keith_j | | Permalink

Steve, my reading of Rebecca's article and the budget guidance is broadly the same as yours. My only comment on your calculations is that the Chancellor announced an increase in the child element of Child Tax Credit of £150 per child from April 2011 so the current maximum amount of £7445 will increase to £7595. Thus a family with 1 child will lose all their tax credits at an income of £24,944.

Your basic conclusion is correct that many families on modest incomes will cease to be eligible for tax credits. Thus the changes have gone further than either the Lib Dems or the Tories put in their manifestos.

Like you I am worried about the reduction in the income disregard. We have many self employed clients who are eligible for tax credits who are likely to end up with overpayments through no fault of their own. I appreciate that the £25,000 income disregard was open to abuse but a reduction to £5,000 is going too far in the other direction .