INTRODUCTION AND SUMMARY

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					                              INTRODUCTION AND SUMMARY


This note describes the impact of changes to the tax credit system for low-paid families.

It first gives a brief overview of the main changes that were announced in the 2010 Budget and
the 2010 Comprehensive Spending Review and which are to be implemented in April 2012.1

It then analyses the impact of some of these changes, particularly the new 24-hours per week
condition for claiming Working Tax Credit (WTC) and the abolition of 50 plus element.

Summary of key findings:
       The 24-hours per week rule to qualify for WTC will cost a low-income couple-family with
        one child with only one part-time worker about £71 per week or almost a quarter of their
        net income. Considering the net effect of other changes, the family will be £63 worse off
        after the rule is introduced.

       If the sole earner in a low-income couple-family with one child faces a reduction in her
        working hours from 30 to 20, the family will be £68 a week worse off because of the 24 -
        hours rule, compared to £32 a week had the rule not been introduced.

       The introduction of the 24 hours per week rule will push such low income families deeper
        into poverty.

       An older single adult returning to work for less than 30 hours a week will lose £60 a week
        due to the abolition of the 50 plus element of WTC.

       All the examples in this note show that Council Tax Benefit and Housing Benefit (for those
        who rent) act as general shock absorbers in the system, partially offsetting the fall in
        income due to loss of other benefits. This sensitivity will be lost when Council Tax Benefit
        is abolished in April 2013 and replaced by local schemes.




1
 Some of these changes have already been implemented with effect from last year. See
http://www.npi.org.uk/files/New%20Policy%20Institute/Overview%20of%20Welfare%20Changes.pdf for more detailed
description of these changes.
 OVERVIEW OF CHANGES TO TAX CREDITS COMING INTO
              EFFECT FROM APRIL 2012


1. New working hours rules for Working Tax Credit (WTC) -
   Couples with children can currently get WTC if at least one partner works at least 16 hours
   a week. From April 2012, couples with children will have to work 24 hours between them,
   and one must work at least 16 hours. Couple households with one partner working 16
   hours, and one not working or working less than 8 hours, will now lose their WTC
   entitlements unless the household can increase its working time. This change does not
   affect lone parent households.

2. Abolition of 50 plus element of WTC -
   This element is aimed at incentivizing older adults back into work. Currently claimants
   aged 50 and over who return to the job market after a period on certain benefits are
   eligible for an additional 50-plus payment, for 12 months from the date at work. The rates
   are up to £1,365 per year for someone working between 16 to 29 hours a week and up to
   £2,030 per year for someone on 30 hours or more a week. Abolishing this element means
   that from April 2012, those over 50 who are working between 16 to 29 hours a week and
   are entitled to WTC via the 50 plus element alone will lose all their WTC entitlement.
   Those who are working more than 30 hours will continue to receive WTC but at the (lower)
   rate applicable to younger working-age.

3. New income ‘disregard’ when income falls in-year -
   Currently, if income falls below previous year's income, by however little, the claimant can
   immediately apply for a higher award. However from April 2012, any reduction in income
   in a year of less than £2,500 will have no impact on a tax credits award in that year. For
   reductions more than £2500, the first £2500 will be ignored. The full amount of the
   reduction will be taken into account for the following tax year.

4. Scrapping the increase in Child Tax Credit (CTC) -
   In CSR 2010, the Chancellor had promised a one off increase of £110 in the child element
   of Child Tax Credit on top of the inflation for 2012-13. However this has been scrapped
   and the child element will instead increase only in line with the Consumer Price Index.

5. Lone parents and couples elements of WTC will be frozen -
   This is in addition to the basic and 30 hour elements which were already frozen in 2011.
                                           IMPACT ANALYSIS


This section aims to model some of the above mentioned changes in order to estimate their
impact. In addition to these, we also model the effects of the 10% reduction in percentage of
childcare costs eligible to be paid, which came into effect last year.

We consider four case studies here; the first two show the impact of the new hours rule on single
earner families, the next one highlights the impact of the abolition of 50 plus element and the last
case study analyses the effects of cuts in childcare.2

        Case study 1a – shows the impact of the new hours rule on a couple family with a child
         where one person works part time and the partner is not in paid work. It also takes into
         account the impact of freezing the value of benefits, many of which (e.g. Child Benefit)
         were frozen in April 2011.

        Case study 1b – shows the impact of the new hour rule on a couple family with a child
         where one person works full time and the partner is not in paid work and the full-time
         worker is faced with a cut in working hours.

        Case study 2 - shows the impact of the abolition of the 50 plus element on a single person
         aged 51 and working 20 hours a week.

        Case study 3 – analyses the impact of a 10% cut to maximum childcare costs eligible to
         be paid under WTC on low income families with relatively high childcare costs (note this
         change has already been implemented in April 2011).

The low pay threshold used in the case studies here is the lower quartile value for each group -
£6.63 per hour for part time local government workers and £8.72 per hour for full time local
government workers,3 unless specified otherwise.




2
  We have modelled the impact of the income disregard in an earlier report, the case study (number 4: small cut in full
time hours) can be found at
http://www.npi.org.uk/files/New%20Policy%20Institute/Impact%20Analysis%20of%20Welfare%20Changes.pdf
3
 Living on the Edge: Pay in Local Government, available at
http://www.npi.org.uk/files/New%20Policy%20Institute/Living%20on%20the%20edge%20FINAL.pdf
      CASE STUDY 1A – IMPACT OF 24-HOURS RULE ON SINGLE
      EARNER FAMILY WITH ONE ADULT WORKING PART TIME


The family                     Mr and Mrs Smith, with one child aged 4.
                               Mr. Smith works 20 hours a week at an hourly rate of pay of £6.63 (lower quartile
                               pay for part time workers in local government). Mrs Smith does not have a paid job.

Housing                        The Smiths own their house outright. They have to pay £20 per week in Council
                               Tax.

Income before benefit          In 2011-12, the Smiths have net earnings of £133 per week.
changes
                               They receive £20 in Child Benefit, £60 in CTC and £71 in WTC.
                               They also receive £10 in Council Tax Benefit and have to pay £10 towards their CT
                               liability.
                               Thus their net weekly income after CT has been paid is £273.

Benefit changes considered     The new hours rule for claiming WTC couple families with children
here
                               Freezing of benefits – Child Benefit and various elements of WTC
                               Scrapping of above indexation increase in CTC

Financial impact of the        Had the benefit changes not taken place, the Smiths would have gained £10 in
changes                        2012-13 from the up rating of benefits in line with inflation.
                               However, because of the changes, the Smiths will:
                                       Lose £71 in WTC because they will not be eligible for WTC as their
                                        combined working hours are less than 24
                                       Lose £5 because of freezing the value of benefits
                                       Gain £3 in CTC instead of £5 as it has been up rated in line with inflation
                                        and the above inflation increase of £110 has been scrapped
                                       Gain £10 in CTB
                                       Lose £63 per week in total

Comparison with poverty        The Smiths need at least £335 per week to stay above the poverty line.
line (BHC basis, up rated to
                               Even before the benefit changes are introduced in April 2012, the Smiths are below
2012)
                               the poverty line, the changes will push them deeper into poverty.

Variant 1 – with housing       If instead of being owner occupiers, the Smiths were renting a flat for say £100 a
costs                          week, they would be entitled to £67 of Housing Benefit in 2011-12.
                               When the new rule comes into effect from April 2012, the family will lose their WTC.
                               This loss leads to an increase in housing benefit of about £33, which would offset
                               some but not all of the £71 tax credit loss.
                               Besides showing role of housing and council tax benefits as general ‘shock
                               absorbers’ in the system, this example also shows cuts in tax credits tend to have a
                         bigger impact on low-income owner occupiers.

Variant 2 – on average   If Mr. Smith works 20 hours a week at an hourly rate of pay of £8.01 (median pay
earnings                 for part time workers in local government), from April 2012 the Smiths will lose all
                         WTC worth £59 a week, lose £4 due to freezing of benefits but gain £6 in CTC and
                         NI. Hence their net loss would be £57 a week.
      CASE STUDY 1B – IMPACT OF 24-HOURS RULE ON FAMILY
         FACING A CUT IN WORKING HOURS FROM 30 TO 20



The family                     Mr and Mrs Brown, with one child aged 4.
                               Mr. Brown works 30 hours a week at an hourly rate of pay of £8.72 (lower quartile
                               earnings for FT workers). Mrs Brown does not have a paid job.
                               Mr. Brown’s working hours are cut from 30 to 20 hours a week in May 2012.

Housing                        The Browns own their house outright. They have to pay £20 per week in Council
                               Tax.

Income before benefit          In 2011-12, the Browns get £223 per week in net earnings, £20 in Child Benefit,
changes                        £60 in CTC and £33 in WTC.
                               They do not get any CTB and hence have to pay the full £20 towards their CT
                               liability.
                               Their net weekly income after CT has been paid is £316.

Benefit changes considered     The new hours rule for claiming WTC couple families with children
here

Financial impact of the        Mr Brown’s gross earnings fall by £87 a week as a result of the cut in hours.
changes
                               If this fall had happened before April 2012, the Browns would have been able to
                               apply for an increase in their tax credit payments in 2011-12 worth about £21 a
                               week, taking their total WTC payment to around £54 a week.
                               Taken together, the Browns would have been worse off by £32 as a result of the cut
                               in hours (they lose £59 in net earnings, but gain £21 in WTC and £7 in CTB).
                               After April 2012, a couple whose combined paid weekly hours are less than 24 is
                               not entitled to working tax credit. Therefore, the fall in gross earnings is
                               accompanied by the loss of WTC worth £54 per week.
                               Thus after April 2012, the Browns would lose £56 in net earnings, £33 in WTC and
                               gain £18 in CTB and £3 in CTC. They would be £68 a week worse off compared to
                               when Mr Brown was working for 30 hours.

Comparison with poverty        The Browns need at least £335 per week to stay above the poverty line.
line (BHC basis, up rated to
                               The Browns are just on the poverty line as long as Mr Brown works for 30 hours.
2012)
                               The cut in hours and the new hours rule pushes them below the line.
   CASE STUDY 2 – IMPACT OF ABOLITION OF 50 PLUS ELEMENT


The family                     Mr Patel is a 54 year old single adult, working 20 hours a week at an hourly rate of
                               pay of £6.63. He has been working these hours for the last one month after being
                               on Jobseeker's Allowance for six months.

Housing                        Mr Patel is an owner occupier. His CT liability is £20 per week.

Income before benefit          Before 2012, Mr. Patel gets £133 per week in net earnings and £60 in WTC, as he
changes                        is eligible for WTC via the 50 plus element.
                               He does not get any CTB and hence has to pay the full £20 towards his CT liability.
                               His net weekly income after CT has been paid is £172.

Benefit changes considered     Abolition of the 50 plus element of WTC
here

Financial impact of the        From April 2012, Mr. Patel will lose all of his WTC entitlement worth £59. This is
changes                        because after the abolition of the 50 plus element, he can no longer qualify for WTC
                               via this route and will need to work at least 30 hours a week to qualify for WTC.
                               He will gain £9 in CTB.
                               His net loss per week will be £51.

Comparison with poverty        Mr. Patel needs £186 a week to stay above the poverty line. Even before 2012, he
line (BHC basis, up rated to   was under the poverty line, but once his WTC entitlement is taken away, he is
2012)                          pushed further below.
                CASE STUDY 3 – IMPACT OF CUTS TO CHILDCARE
                        (IMPLEMENTED IN APRIL 2011)


The family                             Mr and Mrs Wilson, with one child aged 2.
                                       Mr. Wilson works 30 hours a week at an hourly rate of pay of £6.63. Mrs Wilson
                                       works 16 hours a week at an hourly rate of £6.08 (National Minimum Wage).
                                       The Wilsons have weekly childcare costs of £119 (Daycare Trust’s estimate of the
                                                                                     4
                                       average for 25 hours/week in 2011 in London).


Housing                                The Wilsons own their house outright. They have to pay £20 per week in Council
                                       Tax.

Income before benefit                  In 2010-11, the Wilsons got £272 per week in net earnings, £20 in Child Benefit,
changes                                £55 in CTC and £116 in WTC (including the childcare element).
                                       They did not get any CTB and hence had to pay the full £20 towards their CT
                                       liability. They also had to pay £91 towards their childcare bill.
                                       Their net weekly income in after paying the CT and childcare was £324 in 2010-11.

Benefit changes considered             10% reduction in percentage of childcare costs eligible to be paid
here
                                       Freezing of benefits – Child Benefit and various elements of WTC

Financial impact of the                Compared to their net weekly income in 2010-11, in 2011-12 the Wilsons are £6
changes                                worse off as they -
                                                Gain £6 due to the change in the income tax and national insurance
                                                 personal allowance thresholds
                                                Gain £5 in CTC due to above indexation increase in the child element
                                                Lose £14 because of changes to WTC (mainly reduction in the childcare
                                                 element)
                                                Lose £3 due to freezing of benefits
                                       From April 2012, the Wilsons are £2 per week worse off than in 2010-11. This is
                                       because they –
                                                Gain £10 due to changes in the income tax and national insurance
                                                 personal allowance thresholds
                                                Gain £8 in CTC
                                                Lose £14 because of changes to WTC (mainly reduction in the childcare
                                                 element)
                                                Lose £5 due to freezing of benefits



 4
  The case study uses a lower hourly rate( lower quartile hourly rate of £6.63 for PT workers as opposed to £8.72 for FT workers) and
 allots higher childcare cost (average cost for London rather than for England as a whole) so as to clearly bring out the full impact of the
 change.
Comparison with poverty        The Wilsons need at least £335 per week to stay above the poverty line.
line (BHC basis, up rated to   Irrespective of the changes, the Wilsons are below the poverty line at their current
2012)                          levels of pay and hours.

				
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