Working Child Tax Credit Cuts Average £2k per Household From 2016-17

By: Nadeem_Walayat

As expected the Chancellor George Osborne took a hatchet to the Labour legacy Working and Child Tax Credits system that had mushroomed from an initial budget of £2 billion a year to £30 billion today, succeeding in creating a pool of some 4 million vested interest families and acting as a huge inducement for a 15 year long mass immigration trend into Britain which remains out of control as illustrated by the most recent immigration statistics (+318k).

The cuts will ultimately amount to slicing £9 billion from the current tax credits £30 billion bill. However this reduction in what amounts to a subsidy to employers will be phased in over the next 4 years as detailed below:

Income Threshold for tax credits Reduced

This is where the real big cuts will come for most households from April 2016 onwards. The income threshold below which households receive the maximum amount of benefits will be reduced from £6,420 to £3,850. What this means is that for ever £1 a household earns over £3,850 will be reduced by 41p. However the rate of reduction INCREASES to 48p. Which therefore implies a tax credits cut of upto £1,233 per household. Furthermore the jump from 41p to 48p amounts to a 7% benefits cut on payments ABOVE the previous threshold of £6420 i.e.

Tax credit cut of 48p per £1 earned on the first £2,570 (£6,420 - £3,850) = £1233.

Tax credit cut of 7p per £1 earned above £6,420.

Household Income Examples -

£16k income - Cut = £1233+£670 = £1,903

£18k income - Cut = £1233+£810 = £2,043

£20k income - Cut = £1233+£950 = £2,183

£24k income - Cut = £1233+£1230 = £2,463

And ironically this will primaily hit those IN WORK rather than OUT OF WORK due to to much lower earnings where the shortfall is made up by other out of work benefits which do not count against the threshold. Therefore on face value the change is an incentive for families on low paid NOT to work.

Limited to 2 Children

As of April 2017 new child tax credit application awards will be limited to the first 2 children only. Whilst this does not apply to current or future claims upto April 2017, however it will apply if there is a break in tax credit claims of greater than 6 months. The 2 child limit will also apply to housing benefit.

Tax Credits Freeze

A string of benefits including tax credits will be frozen for 4 years from April 2016 allowing inflation to erode the real terms value by an estimated 10% of the current value of the benefits.

Benefits Cap Cut

Household maximum benefits will be cut in London to £23k and to £20k outside London, which includes tax credits.

Typical households in receipt of tax credits with 2 or more children should typically budget for at least a £2k reduction in their tax credit awards for 2016-17, and that is BEFORE the impact of inflation. So low paid families are going to feel the pain as most could experience a 10% drop in total household incomes with further cuts to come in subsequent years as a consequence of the benefits freeze.

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By Nadeem Walayat

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Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

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