From April 2016, the government will reduce the level of earnings at which a household’s tax credits and Universal Credit award starts to be withdrawn for every extra pound earned. In tax credits, this point (known as the income threshold) will be reduced from £6,420 to £3,850. The equivalents in Universal Credit (work allowances) will be reduced to £4,764 for those without housing costs, £2,304 for those with housing costs, and removed altogether for non-disabled claimants without children. The government will also increase the rate at which a person’s or household’s tax credit award is reduced as they progress in work, by increasing the taper rate in tax credits from 41% to 48%.
The Budget will also reform tax credits to make them fairer and more affordable. On top of Child Benefit for every child, an out of work family with 5 children can currently claim over £14,000 a year in tax credits alone. The government believes that those in receipt of tax credits should face the same financial choices about having children as those supporting themselves solely through work.
The Budget will therefore limit support provided to families through tax credits to 2 children, so that any subsequent children born after April 2017 will not be eligible for further support. An equivalent change will be made in Housing Benefit to ensure consistency between both benefits. This will also apply in Universal Credit to families who make a new claim from April 2017.
In addition, those starting a family after April 2017 will no longer be eligible for the Family Element in tax credits. The equivalent in Universal Credit, known as the first child premium, will also not be available for new claims after April 2017. In Housing Benefit, the family premium will be withdrawn for new claims from April 2016, to ensure fairness between those who receive Housing Benefit and those who do not.
Child Benefit will continue to be paid at the same level for all children. The existing entitlement of families who remain in receipt of tax credits and Universal Credit will be unaffected by the reforms to limit support to 2 children and the abolition of the family premium. This will mean that those who already have larger families and have made plans on the basis of the current system will not lose out. The disabled child premia in tax credits and UC will also continue to be paid to all children with a disability.
These changes will see expenditure on tax credits return to 2007-08 levels in real terms. In 2016-17, 5 in 10 families with children will be supported through tax credits, down from 6 in 10 today and 9 out of 10 in 201059. Chart 1.15 compares past and forecast expenditure on tax credits and predecessor benefits as a proportion of GDP, and illustrates the impact of these reforms.