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Tax credit changes in April 2011 – the facts
15/07/2010, by Low Incomes Tax Reform Group, Tax Articles - General
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LITRG looks at the tax credits changes due to come in from April 2011, anticipating what they may mean for claimants.

Introduction

The emergency budget on 22 June set out several substantial changes to the tax credit system. Some are straightforward; others less so.

Below, we summarise those changes coming in from April 2011 under the following headings, explaining what each means and who might be affected:

  1. Increases in rates and thresholds
  2. Withdrawal rates
  3. Family element withdrawal rate
  4. The baby element
  5. Older workers
  6. Disregards

1.  Increases in rates and thresholds

The announcement 

The Consumer Price Index (CPI) will be used to uprate all of the tax credit elements from April 2011. But child tax credit (CTC) claimants will receive an increase of £150 on top.

What does it mean? 

Each year, the rates of tax credits and other benefits are increased. Normally this is in the form of a percentage, linked to the Retail Price Index. However, the change means that the percentage increase will now be decided using the CPI which is usually less generous.

Who will it affect?

All tax credit claimants. However, those who claim CTC should be more than protected by the £150 addition.

2.  Withdrawal rates

The announcement

From 6 April 2011, the withdrawal (or ‘taper’) rate will increase from 39% to 41%.

What does it mean? 

The first step in a tax credit calculation is to work out the maximum possible entitlement. This maximum (not including the family and baby elements) is then reduced when household income starts to go above certain thresholds. Currently this means that if you claim working tax credit (WTC) or both WTC and CTC, your entitlement is progressively reduced by 39p for each £1 by which your income goes above £6,420 a year. If you claim CTC only, that income threshold rises to £16,190 a year.

The change means that in future claimants will lose 41p instead of 39p for each £1 of income above those thresholds (or a further £20 for every £1,000 of income).

Who will it affect?

Most claimants. Anyone with income at or below those thresholds will not be affected, nor will anyone in receipt of income support, pension credit, income-based jobseekers allowance or income-related employment and support allowance.

3.  Family element withdrawal rate

The announcement

Families with household income above £40,000 will start to have their family element of £545 a year tapered away from 6 April 2011 at a rate of 41%.

What does it mean? 

Under current rules, CTC claimants receive the full family element until their income reaches ‘the second income threshold’. For most people that is annual income of £50,000 (although for some it may be much higher). Above that amount the family element is withdrawn at 6.67%, or £1 in each £15 by which income exceeds that figure. Changing the second income threshold to £40,000 and the taper rate to 41% means that the withdrawal starts at lower income levels and at higher rates.

Who will it affect?

The complexity of the system means that there is no straightforward rule to work out who is affected, because it will depend on your family’s circumstances. Some families currently receiving £545 (or £1,090 if they have a child under the age of one) will no longer receive any tax credits, whilst other families on higher incomes will see a reduction in the amount they receive.

4.  The baby element

Announcement

The baby element of tax credits will cease from 6 April 2011.

What does this mean?

Currently, families with a child under the age of one receive an additional element worth £545 when working out their maximum tax credits. This element is to be removed completely.

Who will it affect?

Families with a child under one will no longer have this element included from 6 April 2011. The details of how this will work are not yet known, but anyone who has a child born after 5 April 2010 may see a reduction in their tax credits from April 2011 rather than from the date their child’s first birthday.

5.  Older workers

The announcement

The previous announcement that those aged 60 and over would be able to qualify for WTC by working at least 16 hours per week (rather than 30 as currently required) will still go ahead from April 2011.

What does it mean?

At present, if you don’t have children or qualify for the disability or 50+ elements, you need to work at least 30 hours per week to claim WTC. This change will mean that those aged 60 and over will qualify for WTC by working at least 16 hours per week rather than 30.

Who will it affect?

Anyone aged 60 or over on 6 April 2011 who is working at least 16 hours but less than 30 as they will then be eligible to claim WTC providing they meet the other conditions.

6.  Disregards

The announcement

The tax credit income disregard will change from £25,000 to £10,000 from 6 April 2011.

What does it mean?

The disregard is one of most complex parts of the tax credit system. Tax credits are paid based on current circumstances and household income from the previous tax year.

After the tax year ends, HMRC compare your actual income for the year just ended with your income for the previous year. Provided your income for the year just ended is no more than £25,000 higher than in the previous year, your award will be unaffected and there will be no overpayment. Hence the term ‘disregard’, because the first £25,000 of any income increase is disregarded when calculating your award. That £25,000 figure will come down to £10,000 in 2011/12.

Who will it affect?

The £25,000 disregard has been very generous. Replacement by a reasonable disregard of £10,000 will not affect most people on lower incomes. It may however impact those moving from benefits into work and reduce the level of credits in the first year of employment.

Useful links

Emergency Budget – the low-income summary 

About The Author

The Low Incomes Tax Reform Group (LITRG) is an initiative of the Chartered Institute of Taxation to give a voice to those who cannot afford to pay for tax advice. LITRG comprises tax specialists from professional practice and the voluntary sector, from publishing and from HM Revenue & Customs, together with people from a welfare benefits and social policy background. Visit www.litrg.org.uk for further information.
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