Analysts at Oxford Economics just emailed around a chart that does a great job of explaining precisely what’s going to happen to UK tax credits in when major changes come in April.
The issue has become a political hot potato, and that’s for good reason — some households will see very large declines in their take-home income after the changes come in.
In short, the credits received will be slightly lower, start declining when you earn less money, and fall faster as your income rises. The chart illustrates the situation for a family of two in which both adults work — the blue line is what happens now, and the red line is what will happen in the 2019-20 fiscal year, after a bundle of changes announced in the government’s last budget come in.
The threshold at which the tapering begins has been cut from £6,420 to £3,850.
What’s more, the rate at which it declines is steeper — rising from 41% to 48%. That means that right now, for every £1 a family earns above the (£6,420) threshold, they will get £0.41 less in tax credits.
But from April, that will be considerably more sharp. From then on, once you earn more than the (£3,850) threshold, for each additional £1 the family earns, they will get £0.48 less in tax credits. It’s a double whammy.
So at the moment, a family with one child and combined earnings of £26,999 will be eligible for a very small tax credit top-up if they earned up to around £27,000 between them. From April, that figure will be £21,000.
Oxford Economics gives an illustrative example:
Consider a couple with two children, working 40 hours a week combined (with one working 16 hours and the other 24) on the minimum wage. Under the current rules, they receive £7,974 in tax credits a year. But from next April, they will lose £1,730 in tax credits in 2016/17 compared to the amount received in 2015/16. From April 2017, the household in question will receive £5,533 in tax credits, a loss of £2,441 compared to 2015/16.
A loss of thousands of pounds is a pretty enormous squeeze on a household with such a low income, and without any mitigation, that will be the reality from April onwards.