Tax credits to hit working families on below average incomes, warns independent research body

Recent changes to tax credits will have a massive effect on those families earning between £18,000 – £30,000, warns the Resolution Foundation.

      
Recent changes to tax credits will have a massive effect on those families earning between £18,000 – £30,000, warns the Resolution Foundation.
The independent research and policy organisation claims those families whose household income is below average but above the level to qualify for benefits are those who will be hit hardest.
Gavin Kelly, chief executive of the Resolution Foundation, said those families were the ”untold story” of the comprehensive spending review recently announced by the Government.
Households with one higher rate tax payer will lose child benefit, whilst households with two basic rate salaries, and a higher combined household income, will continue to receive child benefit.
This move hits families in which one parent chooses to stay at home to raise children, whilst the other earns a higher rate wage, by a minimum of £1,000 a year, claims the organisation.
But changes to the working tax credit (WTC) penalise lower income families in which both parents – or one lone parent – chose to work and rely on childcare.
These families will see reductions in the value of the childcare element of the working tax credit of as much as £1,000 a year by 2012 for a family with one child in childcare, and £1,750 a year for families with two children in childcare.
The spending review reduced from 80% to 70% the maximum proportion of the costs of childcare that can be covered under the WTC. Although the Government has spoken about increasing families’ disposable income, by raising the income tax personal allowance, for many working families on low incomes, reductions in the value of tax credits will significantly outweigh the benefits of the income tax move, warns the Resolution Foundation.  Increased personal allowances will benefit basic rate taxpayers by around £160 a year in 2012, but households with children and incomes ranging from around £22,000 to £58,000 will lose all or part of the family element of the child tax credit, worth up to £545 a year.
For many of these families, this loss will also more than offset the spending review’s increase in the child element of the child tax credit of £290 a year by 2012.
Also, the elimination of the Education Maintenance Allowance (EMA) will see families on incomes below £30,810, and with a 16-18 year old child in full-time education, lose up to £1,170 annually. 
“The cuts in support for working families are the untold story of the spending review,” said Kelly.  ”Housing benefit changes and the removal of child benefit from higher rate taxpayers, have not surprisingly made the headlines.  But more money is going to be saved from tax credits over the course of the parliament than from either of those measures.
“There have been some positive measures in the Budget and spending review – particularly the increase in the income tax personal allowance, and increases in the child element of child tax credits.  But for most working families, these upsides will be significantly outweighed by the downsides – for every extra pound being spent on tax credits, three are going to be cut.
“Families with incomes of £15k-£30k, particularly those who rely on childcare, will find coping with these changes a real struggle.  The abolition EMA will also hit family budgets. As a group, low to middle earners have already been badly affected by the recession, and will find their living standards even more squeezed when an increased VAT rate kicks in next January, and other charges start to rise.”

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