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More tax credits cuts announced in the Autumn Statement

Published on 29 November 2011

In today’s Autumn Statement the Chancellor announced that tax credits would be cut yet again in real terms in 2012/13. While the basic tax allowance will rise next year by more than inflation, the reductions in tax credits will not compensate low-income families for any fall in their tax bill. And cutting taxes will deliver only limited help to those claiming means tested benefits.

Today in his Autumn Statement the Chancellor announced for 2012/13:

  • uprating of means-tested benefits, including the state retirement pension and state pension credit, by the rise in the Consumer Prices Index (CPI), ie 5.2%;
  • freezing of all elements of working tax credit apart from the disability elements;
  • an increase in the child element of child tax credit by the rise in CPI only – the expected increase of £110 above inflation will no longer take place. The disability elements in child tax credit will rise by the CPI.

The increase in the state retirement pension, pension credit and other welfare benefits is to be welcomed.

However, as forecast in the press, tax credits have been cut yet further. The effect of freezing all elements of working tax credit (WTC) apart from the disability elements will be to reduce work incentives at a time of low growth. This will add to the disincentive effect of decreasing support for working parents’ childcare costs from 80% to 70% of eligible costs from April 2011.

The impact will be felt particularly by some couples who will already be hit by the increase in the number of hours they must work each week in order to qualify for WTC (from 16 to 24 hours between them). Lone parents will also be affected.

Hitherto the Government’s policy has been to keep down any increase in child poverty by raising the individual child element in child tax credit by more than inflation. Today the Chancellor announced that, despite previous statements, he would only increase the child element by £135 in line with inflation. In addition, the effect of freezing all elements of WTC apart from the disability elements will be to keep at £15,860 the amount of income above which child tax credit begins to be withdrawn by 41p for every extra £1 of income. This will further erode the benefit of any increase in the individual child element.

The Chancellor had previously announced an above-inflation increase in the basic personal allowance for tax from £7,475 this year to £8,105 in 2012/13. This is of course to be welcomed.

However, increasing the personal allowance is of no help to those with incomes within the personal allowance, and of limited help to those on means tested benefits. Taking benefits claimants out of tax will increase their net income, so that their benefits entitlement – which is worked out on the basis of net, after-tax, income – is correspondingly reduced.

Contact: Robin Williamson (please use form at http://www.litrg.org.uk/ContactUs)

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