Million families to lose £511 a year in tax credits cull, warns Labour
Ed Balls accuses George Osborne of giving with one hand and taking more away with the other in budget changes
Up to a million families with children stand to lose £511 a year on what is being described as black Friday, according to figures compiled for Labour by the Institute for Fiscal Studies.
In what is likely to be a key battleground in the local elections, the Treasury said the figures were partial and chose to highlight the impact of the lifting of the personal allowances for most basic rate taxpayers.
The Labour analysis follows George Osborne‘s budget last month and is on top of tax increases already introduced, such as last year’s VAT rise which is costing a family with children an average of £450 a year. The figures include the impact of raising the personal allowance.
Labour said more than 850,000 families on modest and middle incomes would lose all their child tax credit, worth about £545 a year. Up to 212,000 working couples earning less than £17,000 a year will lose all of their working tax credit – worth up to £3,870 a year – if they cannot increase their working hours. It is the first time the IFS has put these calculations in cash terms.
According to Labour, a couple with two children on the minimum wage will be better off quitting their jobs if they cannot work at least 19 hours a week. Ed Balls, the shadow chancellor, accused the government of giving with one hand and taking much more away with the other.
Balls said: “For all the government’s talk about increasing the personal allowance, these independent figures show that, while they may be giving one with one hand, they are taking much more away with the other hand. That is why families with children will be an average of £511 a year worse off from tomorrow.”
The two main changes to tax credits are a reduction in the income limit for child tax credit from about £40,000 to about £26,000 for a family with one child and an increase in the number of hours couples with children have to work to be eligible for working tax credit from 16 to 24 hours per week.
Labour said research by the House of Commons library showed the gain to basic rate taxpayers from the rise in personal allowance above normal indexation (ie the real-terms gain) was £42 a year, or 81p a week.
The Treasury countered that 24 million households would be £6.50 a week better off from government action including the increased personal allowance, a rise in the basic state pension and increases in other benefits.
“Even taking into account changes to tax credits, the average household will be £5.50 a week better off in cash terms – with more than 15 times as many gaining than losing.
“Around 24 million households will benefit and around 1.4 million will lose from modelled tax and benefit measures coming into effect this week – so more than 15 times as many will gain than will lose,” the Treasury said.
Separately, the Resolution Foundation, a thinktank aiming to improve living standards for people on low and middle incomes, said thousands of working families would lose up to a quarter of their household income from Friday.
It said a young couple working 23 hours with one child and a household income of £15,500 would have received nearly £6,000 this year in working tax and child tax credits.
From Friday their entitlement to working tax credits is switched off, cutting their annual income by £2,961 (about 19%). Even taking into account the increase in the personal allowance and a small increase in child tax credits, the family is still projected to lose 19% of total income as the gains are offset by the wages squeeze and frozen child benefit.
The impact is greater the less income households have, as they have more working tax credits to lose. A single earner on the minimum wage of £6.08 an hour, working 20 hours a week, will lose £3,910 – more than a quarter (27%) of their income.