Looking at the tax credits cuts ahead of the Autumn Statement

The Chancellor announced a number of cuts in his Summer Budget that will impact on parents receiving tax credits or universal credit. The cuts will reduce the number of parents receiving tax credits and the level of support that is received.

You may be aware that the House of Lords voted to delay consideration of the regulations introducing tax credit cuts until the government provides a scheme of transitional protection for existing claimants and responds to the IFS impact analysis of the cuts. The regulations that the House of Lords rejected prescribed that tax credit claimants would earn less before their award would be reduced and have their award reduced at a higher rate than at present. For many workers this will mean a reduction in their tax credit award, with some ceasing to receive tax credits at all. We will hear in the Chancellor’s autumn statement on 25th November how the cuts for existing tax credit claimants will be softened, but this will not address all of the cuts introduced in the Summer Budget.

The other cuts to tax credits include:

  • loss of family element (worth £545 a year), and
  • restriction of child tax credits to two children. Additional amounts for third and subsequent children will not be awarded for children born after 6th April 2017

So while it will be a relief if the Chancellor softens the cuts to tax credits, existing claimants will not be awarded additional amounts for the third and subsequent children born after April 2017. New claimants will lose £545 though the loss of the family element. Furthermore families claiming universal credit (already a small number in Inverness) will not be protected from the proposed cuts at all. These include:

  • earn less before award is reduced from April 2016, and
  • additional element for first child will not be awarded when first child is born or on new claims after 6th April 2017, and
  • restriction of universal credit to two children. Additional amounts for third and subsequent children will not be awarded on new claims made after 6th April 2017, regardless of then the child was born.

Support for childcare is more generous under universal credit with a maximum contribution of 85% of childcare costs, as opposed to 70% under tax credits. However this will not offset the financial loss from the cuts and under the current conditions for the rollout of UC, most claimants would not be able to choose to claim UC instead of tax credits even if they would be better off.

In addition to the cuts, the Chancellor announced that parents (including lone parents) must look for work when their youngest child turns three from April 2017 but 30 hours free childcare will be available to three to five year olds from September 2017. However the announcement regarding childcare does not extend to Scotland as childcare is a devolved matter. The SNP have committed, assuming they return to power, to provide 30 hours free childcare available to three to five year olds but not until the end of the next parliament. So at the moment we are looking at a gap between parents being expected to look for work and the extension in free childcare.

In early 2017 we expect to see the introduction of “tax free” childcare for parents who are not in receipt of childcare costs through tax credits or universal credits. The UK Government will contribute 20p in every £1 paid towards childcare up to a maximum of £2000 a year. Whilst you can’t get tax free childcare if you are claiming tax credits or UC, fewer people will be entitled to tax credits/UC and will then become entitled to tax free childcare, but for the majority, not at a level that they would have been receiving under tax credits/UC.

So while we wait to hear how the Chancellor will soften the cuts on tax credits, we know this will only mitigate part of the cuts that are coming.