November 2015 Tax Credits Reform Faces Challenge

02/11/2015

Tax Credit reform is proving to be quite a challenge for the Government. The House of Commons passed a motion calling on the government to reconsider the effect on the lowest paid workers of its proposed changes to tax credits due to come into force in April 2016, to carry out and publish an analysis of that effect, and to bring forward proposals to mitigate it. The motion was passed by 215 votes to 0 with support from 20 Conservative MPs.

Just the day before the House of Lords voted to delay its consideration of regulations introducing tax credit cuts until the government has provided a transitional protection scheme and responded to the Institute for Fiscal Studies (IFS) impact analysis of the cuts.

 

These debates have followed considerable press coverage and numerous reports analysing the likely impact of the current reform proposals. Perhaps the most damaging report has come from the Institute for Fiscal Studies (IFS). This report states that the National Living Wage (NLW) will only compensate for 26 per cent of losses due to proposed tax credit and benefit changes.

In a briefing note prepared for the House of Commons Treasury Select Committee, the IFS considers the extent to which households might expect the net losses from the tax and benefit changes that have been announced for implementation in the current parliament to be offset through increased wages as a result of the large increase in the NLW for those aged 25 and over the IFS states that among the 8.4 million working age households who are currently eligible for benefits or tax credits who do contain someone in paid work the average loss from the cuts to benefits and tax credits is £750 per year. Among this same group the average gain from the new NLW, is estimated at £200 per year.

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