Tax credits saved! For now…

Chancellor announces short term reprieve but cuts will bite in the end

“Tax credit cuts reversed!” That’s the headline we’ll be seeing across tomorrow’s newspapers and on the news tonight. In the face of public uproar, and unexpectedly good Government revenues, George Osborne has been able to throw out his incredibly unpopular tax credits policy and protect the incomes of those in low paid or low hours work. But is this the full extent of the story? At the start of his Autumn Statement, Osborne said that “the £12 billion of welfare savings we committed to at the election, will be delivered in full”. How can this be true if the cuts to tax credits have been reversed?

To understand how these savings are made, we need to look at the figures more closely. The £12 billion annual saving is due to be made by the year 2020. Even with the tax credit cuts in full force, the Government “only” planned to save £5 billion from welfare benefits next year. By scrapping the harshest measures in those cuts, the Chancellor is cutting that saving back to £2 billion. This is a genuine and significant reversal of policy in the short term.

As we look further ahead though, the reversal of that policy becomes less significant to the overall spending levels. By 2020 the policies announced today cut the welfare bill by even more than those announced in the summer. There have been a few small changes to the benefits system. Some will have major impacts on selected individuals and families (we’ll talk about those in a moment) but they don’t get close to the amount of savings that the tax credits cuts would have made. The reason? Universal credit.

Universal credit is as big a cut as tax credits would have been

Tax credits are a significant addition to the incomes of people with children and/or in low paid work. Universal credit is replacing tax credits (along with housing benefit and working age out-of-work benefits) over the next few years and is due to be fully rolled out by 2021. Tax credits have, in effect, already been abolished. The important thing to note here is that universal credit is far less generous to workers, especially full time workers, than tax credits are. Without having to cut tax credits, the Government is expecting to save £2.5 billion as people move off them onto universal credit.

It’s a varied system and many people will not lose out as they move onto universal credit, but many workers will. In a comparison with tax credits, Universal credit will leave many people as badly off, or worse, than they would have been if these cuts had not been scrapped (I wrote about this previously). In effect, the cuts are just being phased in over time, not abandoned.

Changes to housing benefit and pension credit

There are other changes though that it is important to mention. Around about £1 billion extra savings are going to be found through smaller cuts announced today. Many of these are administrative changes but a few significantly reduce the incomes of those affected.

Perhaps most immediate is the change to the maximum housing benefit for those in the social sector. At the moment this is fixed at the amount of the rent, unless it is unreasonably high or the tenant has one or more spare bedrooms. From April 2018, this maximum rent will instead be fixed for people who start new tenancies after April 2016 at the local housing allowance rate – a figure based on local private market rents. Now, this is not going to affect the majority of social housing which is well below the market rent. The most important group affected are single people aged under 35 who have no children. Up until now they would have been entitled to a one bedroom flat. Instead, their housing benefit will now be limited to the rate for a room in a shared property, no matter what property they are actually living in. As an example, where I live in Birmingham the maximum housing benefit on a one bedroom flat is £98.87 a week. For a shared property it is £57.34 a week. This is a significant drop and will put social housing out of the reach of many young single people.

While in general pensioners are protected from welfare cuts, an exception has been made in the past for pensioners receiving the savings credit element of pension credit – the extra top-up that that goes to pensioners with small savings or private pension income. The Autumn Statement performs the same trick, and pensioners receiving the savings credit element of pension credit will lose out. The government’s long term aim is to phase out this help altogether, as the new flat-rate basic pension grows, so the savings credit has been squeezed repeatedly. In effect this cut claws-back 40% of the increase in the basic pension for affected groups. So for pensioners receiving savings credit – about 1.5 million households – the £3.35 increase in the basic pension will become a £2 increase once the reduction in other benefits is taken into account.

A further change that directly affects the amount of benefit people can claim relates to the amount of time people can be abroad and still remain entitled to housing benefit or pension credit. Currently, claimants can be absent from their home for up to 13 weeks for any reason without it affecting their claim. From April 2016, if the reason for absence is that the claimant has gone overseas that time will be limited to 4 weeks. This brings these rules partially in line with universal credit which has a one month time limit for absence of any reason.

So, today’s budget offers a short term reprieve for people on tax credits. Over the next four years though, we will see similar cuts being applied through Universal Credit. There will be more tinkering and small changes along the way, but significant cuts will be coming over the next few years regardless of announcements today.

If you think you may be affected, look at entitledto’s benefit calculator to see what Universal Credit might mean for you and what protection you might receive.


Thanks go to Phil Agulnik for his pensions expertise.