Tax credits: 200,000 families worse off by £3,870 a year!

Changes to tax credit rules mean 200,000 families face a cut of nearly £4,000 in their income.

Since the start of the 2012/13 tax year on 6th April, changes to the rules governing tax credits have cut Government support for working families.

In fact, over 200,000 families have lost their entire Working Tax Credit payments, according to new research from the Child Poverty Action Group (CPAG).

Tax credits slashed

CPAG has published figures from HM Revenue & Customs which show that 203,000 families (with 449,000 children) will lose their Working Tax Credits, thanks to changes to the 'working hours' rule. As a result, these low-income families could be £3,870 a year worse off from the next two tax years.

CPAG has warned that the UK could suffer "appalling economic consequences" from "the loss of £500 million pounds of spending by the families affected." This could put further jobs and businesses at risk, especially in the retail and services sectors.

It added: "This is an absolute calamity that plunges nearly half a million children deep below the poverty line. Ministers should have taken responsible action and put the policy on hold until employers could provide the additional hours of work these families need."

Britain's biggest losers

The recent changes to tax credits are many and complex, but the key change -- the adjustment that has the biggest effect -- concerns working hours.

Before 5th April, couples with children needed one parent in work for at least 16 hours a week to qualify for Working Tax Credit (WTC). This weekly threshold was increased to 24 hours between both parents.

Thus, parents who cannot increase their weekly working hours by at least eight hours between them will lose all of their WTC, worth up to £3,870 a year.

Some of these families simply cannot find these extra hours, perhaps because they work in areas of high unemployment, or have childcare commitments that cannot change. As a result, some of the poorest families in Britain will have their WTC claims terminated and, therefore, will be nearly £75 a week worse off.

In total, the CPAG estimates that over 424,000 adults and 470,000 children will be affected by changes to tax credits, which is a total of nearly 900,000 Brits affected.

Big changes in 2014

Two years from now, the Government will replace the current system of tax credits with a catch-all benefit known as Universal Credit.

One of the main points about Universal Credit is that it will reward low-income workers for however many hours of work that they can do. In other words, Universal Credit abolishes the link to set hours of work in favour of tapered support based on earnings, rather than hours worked.

So the recent sea change to WTC will only apply for the next two years before it is cancelled out. Even so, this means two more years of hardship for part-time working parents with low incomes.

Don't miss out on your credits?

Although some families will have their tax credits correctly withdrawn, others will lose some or all of these benefits by mistake. Indeed, since Chancellor Gordon Brown introduced tax credits in April 2003, they have become an administrative disaster for both HMRC and claimants.

To help you to decide whether your claim has been wrongly reduced or cancelled, these are the main changes to tax credits:

1. Lower income limit for Child Tax Credit

Before 5th April, you could usually get some Child Tax Credit if your yearly income was below £41,300.

This threshold has now fallen. As a rough rule, you might not get Child Tax Credit if your yearly income is more than £26,000 and you have one child, or you have two children and your income is more than £32,200.

You could still qualify if your income is above these amounts if, for example, you pay for registered or approved childcare, have more than two children, are disabled or have a disabled child.

2. New working hours for WTC for couples

As I mentioned above, before 5th April, couples with one partner working at least 16 hours a week could get WTC. Single parents are not affected by the changes, but couples with children now need to work jointly at least 24 hours a week to get WTC, with one parent working at least 16 hours a week.

However, there are exceptions to this new rule. These include:

• If one parent is aged 60 or over, then you'll qualify for WTC if they work at least 16 hours a week.
• If one parent gets extra WTC because of a disability, then WTC will be paid if they work at least 16 hours a week and qualify for the 'disability element' of WTC.
• If one parent is ill or disabled, an inpatient in hospital or in prison, then WTC will be paid if one of you works at least 16 hours a week and the other is getting certain benefits due to disability or ill health, such as Disability Living Allowance, is a patient in hospital, is serving a custodial prison sentence or is remanded in custody awaiting trial or sentence.
• If one parent is entitled to Carer's Allowance, then WTC will be paid if one of you works at least 16 hours a week and the other is entitled to (but not necessarily getting) Carer's Allowance.

3. How far payments can be backdated

Previously tax credits could be backdated for up to three months before your claim.

This backdating has been reduced to one month, which could cut up to two months of backdated benefits from some claims. The same cut applies to backdating claims following changes to your personal circumstances, such as having a baby.

Therefore, never delay your claim needlessly, as you are sure to lose out.

4. The '50-plus element' has ended

Previously an extra amount of WTC, called the '50-plus element', applied. This has now ceased.

5. Working hours change for the over-50s

Before 5th April, if you got the 50-plus element, then you needed to work at least 16 hours a week to get WTC.

Now the 50-plus element has stopped, so you can only get WTC in these circumstances:

• If you are not responsible for children, then you or your partner needs to work at least 30 hours a week, or 16 hours a week if you are aged 60+ or are entitled to the 'disability element' of WTC.
• If you are responsible for children, then you need to be working 16 hours a week if single or meet the new 24-hours-a-week rule for couples (see above).

What a dog's dinner

I don't know about you, but these criteria make my head spin -- and I'm a former mathematician. Frankly, I doubt that anyone without degree-level maths skills could accurately interpret these arcane and esoteric rule changes.

So I would urge you to carefully check your entitlement to tax credits online, either by using HMRC's own tax credits calculator, or by using the benefits search supplied by independent website Turn2Us. Turn2Us also has a free helpline on 0808 802 2000, which is open 8am-8pm, Monday to Friday.

Without these online checks, can you really be sure how much you're entitled to claim? I doubt it!

More on tax:

Where a packet of cigarettes will soon cost £50

Why all taxes must rise by 16%!

Tax amnesty for eBay traders and electricians

Ten ways to avoid Capital Gains Tax