We recently outlined the tax credit changes that were due to come into effect in April next year. The cuts were expected to leave families out of pocket by an average of £1,300 a year, sparking concerns amongst many – concerns that have now been echoed by the House of Lords.
In a move that is the first of its kind for over a decade, the Lords voted for the Chancellor to halt the reforms until he comes up with a way of “compensating” low-paid workers. With George Osborne saying that he will listen to the concerns being discussed, what does this mean for the future of the cuts?
The Lords voted by 289 votes to 272 to provide low-income families with “full transitional protections” for the cuts for at least the next three years. A further motion was supported by 307 votes to 277 calling for the cuts to be delayed until an assessment of their full financial impact is carried out. Mr Osborne said after the vote: “I said I will listen and that is precisely what I intend to do.” He went on to further say that he would promise “transitional help” for those affected by the cuts and would set out how the proposed changes to tax credits would be altered, in next month’s Autumn Statement.
Both the Chancellor and David Cameron have said that the defeats in the House of Lords raised a “constitutional issue” that needs to be dealt with.
It’s essentially a waiting game until the Autumn Statement is released later this month and we see what changes are made to the proposed plans. The Chancellor has indicated however, that a complete overhaul is unlikely, he said whilst speaking at Treasury Questions: “We will continue to reform tax credits and save the money needed so that Britain lives within its means, while at the same time lessening the impact on families during the transition."
Tax credits were first introduced by the previous Labour government to help low-paid families. There are two types, Working Tax Credit for those in work and Child Tax Credit for those who have children. Under the current government’s proposals, the income threshold for Working Tax Credits is set to be cut from £6,420 a year to £3,850 from April. Child Tax Credits will be cut from £16,105 to £12,125.
Supporters of the cuts say that taking into account other changes – like the new national living wage, increase in personal tax allowance and extension of free childcare – will make existing claimants better off, although some claimants have expressed their concerns over these cuts. However, if you were expecting to have to factor in these cuts into your budget, at least this won’t be a concern just yet.