Parents will only be able to claim tax credits for two children, the Chancellor George Osborne outlined in his Budget today.
The restrictions will apply to children who are born after April 2017. The Chancellor also announced that tax credits and other working-age benefits will be frozen for four years – including tax credits and local housing allowance, but excluding maternity pay and disability benefits – and that rises in public sector pay will be restricted to 1% per year for the next four years.
In addition, he said the income threshold for tax credits will be reduced from £6,420 to £3,850, with similar reductions for Universal Credit work allowances and the rate at which a family’s tax credit is reduced as parents earn more is to be increased to 48% with the income rise disregard being reduced from £5,000 to £2,500.
The Chancellor also announced plans to introduce a compulsory National Living Wage of £7.20 an hour from next April which he said would rise to £9 an hour by 2020. It will only apply to people aged 25 and over. To help employers fund the rise in wages, Osborne also announced a cut in corporation tax from 20% to 18% by 2020 and reduced National Insurance contributions for smaller employers.
However, the Living Wage Foundation said it was wrong to call it a Living Wage as this is linked to the cost of living rather than what the Low Pay Commission deems employers can afford to pay so it said it was effectively a rise on the National Minimum Wage rather than a Living Wage.
Meanwhile, from the employers’ perspective, there was concern the cuts in tax would not equal the amount employers would have to pay in increased wages. John Cridland, the CBI’s Director-General, said: “The further reduction in corporation tax is a welcome surprise but tax reductions for employers don’t appear to match the businesses most affected by a rise to £7.20 in the National Minimum Wage next April – a 7% increase.
“The CBI supports a higher skilled, higher wage economy, but legislating for a living wage does not reflect businesses’ ability to pay. This is taking a big gamble that the labour market can absorb year-on-year increases of an average of 6%.”
Mark Beatson, chief economist for the Chartered Institute for Personnel and Development, said: “The proposed National Living Wage is an upgrade of the existing National Minimum Wage for the over 25s. The Office for Budget Responsibility says it will have little net effect on employment, but their forecasts rely on assumptions about future productivity growth that have proved wrong to date. This policy will only deliver higher pay without significant job losses if it is accompanied by a drive to increase productivity in low pay sectors such as retail, hairdressing, hospitality and the care sector – and that will need more than delivery of apprenticeship numbers or employment subsidies via the National Insurance Contributions system.”
Paul Kenny, GMB General Secretary, said: “This is a beautifully crafted con trick by Osborne. On the one hand he offers a vision of a living wage which is welcome. He confirms what GMB has being saying for some time – the vast majority of employers can afford pay rises and no amount of howling from CBI will alter that fact. On the other hand he is taking away money from working families without any guarantee that they will be better off.”
The Chancellor also announced that the benefits cap will be reduced from £26,000 per household to £23,000 in London and £20,000 in the rest of the country. The welfare cuts of £12bn will be spread over four years instead of two. He said the higher rate income tax threshold will rise from £42,385 to £43,000 from next year, lifting 130,000 people out of the higher rate and he added that the personal tax allowance would rise to £11,000 by next year.