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Tax credits – the Child Tax Credit and the Working Tax Credit – were introduced in April 2003 to “tackle child poverty and help to make work pay.”  They replaced Working Families Tax Credit and Disabled Persons Tax Credit, which had been introduced in 1999.  At April 2015, 4.6 million families containing 7.6 million children were receiving tax credits.  3.3 million tax credit recipients (72% of the total) were in-work families, of whom 2.7 million had children.  Total expenditure on tax credits in the UK is forecast to be £29.5 billion in 2015-16.  Expenditure on tax credits increased significantly in real terms during Labour’s term in office.

The Labour Government argued that tax credits would provide a secure stream of income for families with children, whether in or out of work, while tackling poor work incentives. A common framework based on annual assessment, it was argued, would result in a fairer and more transparent system, with less form-filling and simpler administration, while still being responsive to changing needs and circumstances. However, problems were encountered from the outset and in the first year nearly two million families were overpayed a total of £2.2 billion. Overpayments fell in subsequent years, but have increased again – in 2013-14, overpayments of £1.9 billion were incurred.  HMRC’s policy on recovering overpayments continues to cause controversy.

Studies of the impact of tax credits suggest they played an important role in reducing child poverty rates; and in helping to maintain low to middle income families’ living standards, particularly with the stagnation of earnings in the mid-2000s.  Studies also suggest a small but positive boost to employment levels (particularly for lone parents), although the increased number of families facing relatively high rates of withdrawal may have reduced incentives for increasing earnings for those already in work.

Tax credits – along with various means-tested benefits for families of working age – are being replaced by Universal Credit, although the new benefit is not expected to be fully phased in until 2020. The 2010 Government brought in a package of tax credit changes aimed at “controlling the costs of tax credits” in order to “provide a fair and affordable platform for the introduction of the Universal Credit.”  Savings of around £7 billion a year are expected by 2019-20.

There has been recent media speculation that the Government may be considering further cuts to tax credits, to help meet its target of an additional £12 billion a year in welfare savings.  One option reportedly under consideration is reducing the child element of Child Tax Credit to its 2003-04 level (adjusted for inflation).  It is estimated that this would save around £5 billion, but it would have a significant impact on low-income families, including those in work.  In a speech on 22 June, the Prime Minister referred to the “merry-go-round” of people working on the minimum wage, paying tax and then receiving in-work benefits from the government; arguing instead for a move “from a low wage, high tax, high welfare society to a higher wage, lower tax, lower welfare society.”  Announcements on how the Government intends to make further welfare savings are expected in the forthcoming Budget on 8 July.


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