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Tax credits cuts U-turn: what this could mean for you

Published 27 November 2015 by

When the cuts to tax credits were first proposed, some concerns were raised that these changes could leave some families £1,300 a year worse off. These concerns were echoed by the House of Lords when they voted for the Chancellor to halt these reforms unless he came up with a way of softening the blow for low-paid workers.

With a lot riding on the outcome of tax credits, this was an eagerly-awaited part of the Chancellor’s Autumn Statement. We’ll take you through what he outlined in his speech and what this could mean for you.

Scrapping the cuts

George Osborne announced that he would no longer be going ahead with the proposed cuts to tax credits, something that many people hadn’t expected. The Chancellor explained in his speech: “I’ve listened to the concerns. I hear and understand them. And because I’ve been able to announce today an improvement in the public finances, the simplest thing to do is not to phase these changes in, but to avoid them altogether.”

Expectations were that the Chancellor would use the Autumn Statement to outline plans to ease into the cuts, so a complete U-turn caught many by surprise. The tax credit cuts were due to come into effect in April of next year, with the plans being outlined to free up £4.4 billion. The threshold for the full Working Tax Credits was due to drop from £6,420 a year to £3,850 and Child Tax Credits were going to be cut from £16,105 to £12,125 a year.

What does this mean?

The scrapping of these cuts is good news if you currently rely on tax credits to boost your income every month. The current thresholds for Working Tax Credits and Child Tax Credits will remain as they are.

With that said, people who are receiving tax credits are still likely to see their finances change in the long term. This is because tax credits are eventually going to be phased out to make way for Universal Credit to be introduced for all. The move to Universal Credit could mean that the Government will make changes to the thresholds when this benefit comes in.

The Resolution Foundation predicts that the government would look to cut £3.5 billion from Universal Credit by 2020. If this is the case, it expects a single person to be £1,000 worse off and families to suffer a loss of between £2,000 and £3,000 because of this.

Universal Credit is a single monthly payment that merges together some of the benefits and tax credit that you might currently receive. This includes: Income-based Jobseeker’s Allowance, Income-related Employment and Support Allowance, Income Support, Child Tax Credit, Working Tax Credit and Housing Benefit. As Universal Credit lumps all of your benefits payments together, you may find that a budgeting account could help you keep on top of it.

The inclusive benefit is being introduced in stages and is currently being piloted in some areas of the country. When the changes come in next April, it’s estimated that 141,000 families will be affected.