Universal Credit Doomsday for Tax Credits Cash ISA Savers, Here's What to Do
Personal_Finance / UK Benefits Nov 18, 2017 - 04:04 AM GMTBy: Nadeem_Walayat
Britain's hard working low paid tax credits benefit recipients are sleep walking towards their Universal Credits doomsday. Where typically a family of 4 jointly earning £16k per annum will currently be in receipt of £6,700 per annum of TC & WTC, whilst a family of 6 would typically receive £12,400, boosting their annual NET earnings to £28,400 that will have allowed many families to SAVE, without impacting on their tax credit benefit payments as long as the taxable interest earned is under £300. The key here being TAXABLE INCOME, which means interest earned on savings in tax free accounts such as Cash ISA's does not not impact on tax credit awards.
This taxable savings interest rule has allowed many if not most of Britain's 3 million tax credit recipient families to build up sizable Cash ISA holdings to well beyond the limit at which out of work benefits such as Income Support are subject to income withdrawal of £1 per week for every £250 of capital above £6000, with zero entitlement to benefits if capital exceeds £16,000.
So the tax credit system has been a significant encouragement for families to save in Cash ISA's as capital holdings for example of £50,000 currently have zero impact on tax credit awards.
However, all of that is about to change as Tax credit recipient families with ISA's and other tax free savings are facing their Universal Credits Doomsday! Leaving aside the fact that under Universal Credit the same family would typically be in receipt of 20% to 30% LESS in benefits due to the nature of Universal Credit which contrary to Ian Duncan Smiths mantra of 'making work pay' actually does the opposite by penalising work. The more one works the LESS well off they will be under Universal Credit. However that is not the doomsday that tax credits families being switched to Universal Credits will be facing over the next 2 years as instead of a 20% to 30% cut in benefits, many families will lose ALL entitlement to benefits. So a family of 6 will go from currently receiving £12,400 in tax credits per year to receiving ZERO under Universal Credits!
The reason being that Universal Credits in line with out of work benefits such as Income support takes into account CAPITAL rather than TAXABLE EARNINGS, i.e. savings interest. Which means instead of ignoring tax free cash ISA interest, Universal Credit will take into account the capital value of Cash and Shares ISA's. Those £40k to £50k nest eggs built up under tax credits translate into ZERO entitlement to Universal Credit, for which the maximum limit is £16k and £6k being the optimum maximum.
So hard working families who have built up sizeable ISA holdings need to start considering their options right now else they face their Universal Credits Doomsday of ZERO entitlement.
Options such as paying off ones mortgage, to going on a spending spree, buy a new car ? 2 new cars? family holiday of a lifetime? Though I would not advocate buying a bigger mattress to stuff ones cash under!
Perhaps its time to start planning to upgrading the greatest tax free vehicle of all, ones home, either by extending or moving and thus utilising ones Cash ISA holdings before the UC doomsday hits!
The bottom line is that Universal Credits does not work for working more just does not pay, and saving for ones future definitely does not pay! Furthermore, UC is designed to penalise families that rent over those who own their homes who have the get out of jail card of dumping their £40-£50k cash ISA holdings into their mortgages and thus increasing the equity in their homes, whilst those who rent are stuck and either have to spend most of their savings or lose all of their benefits even if their savings are only a fraction of the equity that home owners enjoy.
So no, Universal Credits just does not work!
By Nadeem Walayat
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Nadeem Walayat has over 30 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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