The increased withdrawal rate means those who lose the most will be those with the greatest need
With the Government’s proposed tax credit cuts being debated in parliament, much of the focus has been on the average losses many people will be receiving. These losses are significant. Talk has been of the average loss being £1,300 but averages don’t help much as the effects vary widely. Almost everyone currently receiving working tax credit or combined working and child tax credit will lose at least £1,233.60 a year from their tax credit entitlement. People receiving child tax credit only will lose over £1,900 if their gross annual income is a little over £16,000. These are major cuts and easily understandable – if you get these tax credits, you will lose out.
Slightly more complex, and so less in the news, is the reduction to the withdrawal rate if your income is over certain income thresholds. For working tax credit this affects pretty much every claimant. This change significantly increases the amount you stand to lose from the tax credit cuts if you have a higher income. Currently, if we take working tax credit as an example, for every £1 of gross income you have over £6,420 you lose 41p of tax credit. Under the proposed rules this withdrawal rate goes up by 7%. You now lose 48p for every £1 you earn over the threshold. The effect of this is that the higher your income, the more you lose from the tax credit cuts (assuming you qualify for tax credits in the first place).
Not just the better off who lose out
This doesn’t just mean that the better off no longer qualify, although it does partially mean that. Also strongly affected are those with the highest need. Those with the greatest need invariably have the highest maximum tax credit award. A couple with two children can claim almost £11,000 in tax credits in a year. If those two children were disabled, they could claim more than £17,000; even more if the disabilities were considered severe. They have a higher need so a higher potential entitlement. Because household income reduces the award from the maximum, those with a higher maximum award also have a greater potential for earning whilst still receiving some help.
That first couple qualify for at least a little tax credit if they have a combined annual income of around £33,000. If the proposed cuts are brought in, they will no longer qualify for tax credits if their gross income is around £26,500. They will lose all of the £2,650 of tax credits they previously received. If their income was higher, say £30,000, then they only had £1,200 of tax credits to lose in the first place (although they will lose them entirely). If their income was £15,000 they will lose around £1,800. The higher their income the greater the loss, up to the point where their entitlement is reduced to zero.
In contrast the couple with disabled children currently still receive some help if their household income is £48,000. They have a higher maximum award and, therefore, a longer withdrawal period before their tax credits reduce to zero. This means they stand to lose more from the increased withdrawal rate. After the cuts they will lose their tax credits entirely at an income of around £39,600. With an income this high, they will lose over £3,500 a year. This is a significantly higher loss than the family without disabled children could possibly lose.
Who loses the most from these cuts?
None of this is to say that disabled children are being singled out by this policy. Any factor which increases your potential maximum tax credit means you can earn more and retain entitlement. The higher your maximum award, the higher the potential loss but to lose out to that greater degree, you have to have the higher amount of earnings. Within that, the people who lose most are those whose incomes are just high enough to lose all of their entitlement under the new rules – you could call them “hard-working families” if you were a politician. As income gets higher or lower from this point, the potential loss recedes.
So, who is most at risk from this higher potential loss? Disabled children, as we have seen. Disabled workers. The more severely disabled the higher the risk. Those who work over 30 hours and those with childcare costs. People with more children. Any of those factors, and every additional child, currently increases the maximum award and therefore the maximum potential loss.
Looking back at those average losses we can see that the change to the withdrawal rate increases the cuts far above the average £1,300. Almost everyone who loses will lose at least that average amount and many will lose far more. And it is not just the better off who will lose out. Those better off with the highest need will be the most affected and will lose the most. “Hard-working families” may lose out but “hard-working families with disabled children” have the potential to lose out far more.
To find out how you could be affected by the changes to tax credits try the benefits calculator at www.entitledto.co.uk. To discuss training or consultancy on these issues contact Turquoise Training and Consultancy to discuss how we could help you.