Committee calls for pause in cuts to tax credits

The cross-party Work and Pensions Committee has called for the £4.4bn tax credit cut programme, announced in the Summer Budget, to be postponed for a year - and a half and a plan for an overhaul of the in-work benefits system developed.

In a unanimous report, the Committee found that the measures the Government has so far cited in mitigation of tax credits will simply not reach many of those worst affected. And the benefits for those who would be helped are dwarfed by the cuts. As things stand the majority of families affected will be worse off by 2020-21.  

Findings

The Committee found that increases in the income tax personal allowance and the National Living Wage should not be confused with compensation for tax credit cuts. An individual will only start to pay income tax when they earn more than £11,000, but will start to lose tax credits if their combined household earns as little as £3,850. At best, half of families facing tax credits will benefit from the personal allowance increase.

A single earner with two children working 35 hours will increase their net income by £323 a year under the National Living Wage. However, they will lose £1,701 in tax credits, leaving the family £1,378 worse off overall.

The raid on Universal Credit as a means of covering adjustments to the tax credit cuts combined with Income Tax, National Insurance (NI) and implications for Housing Benefit mean that many individuals would keep just 7p of every £1 in earnings: a marginal deduction rate of 93%. This runs directly against the Government’s objective of making work pay.

Comments

Frank Field MP, Chair of the Committee, said: “No one has been able to provide the Committee with a satisfactory series of mitigating policies to combat the impact of cuts in tax credits next year. My advice to the Chancellor would be to pause and use the next 18 months to bring forward a major overhaul to abolish tax credits as we know them. A new system could come in fully by 2020 when the Chancellor’s National Living Wage will be paying a wage of £16,000 per year. This would allow him to question whether a reformed tax credit system shouldn’t be remodelled to help only lower earning families with children."

Commenting on the report, a treasury spokesman said that the report was “out of date” because Mr Osborne had already said he would listen to concerns and announce new transitional measures in his Autumn Statement.

He added that the report had not considered other measures the government was introducing to support working families. He said that these would include: “Free child care that will be worth £5,000 per child, freezes in council tax and fuel duty throughout the last parliament, higher public spending on the NHS and schools,” and the “upward pressure on wages up the income scale that we are already starting to see thanks to the new National Living Wage.”

Controversial tax credits cuts

The controversial tax credits cuts, details of which are set to be announced in the Autumn Budget Statement on 25 November, have caused political turmoil in both Houses of Parliament. The House of Lords previously voted to delay the proposals until the Conservative government comes up with an alternative to aid low paid workers.

Tax credits were introduced by the last Labour government as part of series of benefits aimed at helping the working families at the lower earnings level. The Conservative Party promised in its 2015 manifesto that it would not cut the tax credits.

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Source: Commons Select Committee press release