April benefit changes (mostly reductions...)

April is the month that changes to benefit rules announced in budgets and autumn statements usually take effect. This includes everything from major structural changes to annual inflationary increases. It won't surprise anyone, I think, that almost all the changes this April are negative ones...

Annual uprating

In the 2015 budget the then chancellor announced a freeze on the main working age benefits: there would be no inflationary increase in 2016, 2017, 2018, and 2019. There is no freeze on benefit rates for claimants who are old enough to receive a state pension.

For working age claimants, it is easiest to list which rates are going up:

• Bereavement benefits (although see below in this post for bad news for some bereaved claimants);
• Disability Living Allowance and Personal Independence Payment 
• Carer’s Allowance ;
• Disability and carer related premiums that form part of means-tested benefits (for example, a single claimant who is on income-based JSA and is also in receipt of Personal Independence Payment their basic personal allowance will remain the same as previously (£73.10 per week) but the additional disability premium they should be getting will rise (from £32.25 to £32.55 per week); 
• The extra amount of Employment and Support Allowance and Universal Credit paid to claimants in the 'support group' - there is no increase to extra amount paid to claimants in the 'work-related activity group' (and see below for other changes for new claimants);
• Incapacity Benefit (for the few claimants who are still getting this);
• Industrial Injuries Disablement Benefit, and related benefits;
• Maternity Allowance;
• Statutory Sick Pay, Maternity Pay, Paternity Pay, and Adoption Pay;
• Adult dependancy increases for some benefits (rare).

There's also a (very) small positive change to Universal Credit. The taper rate is being reduced from 65% to 63%. This means that any relevant earnings received by a claimant reduces their benefit by 63p in the pound rather than 65p. This does not, though, come close to redressing the reductions in 2016 of the work allowances (the amount claimants can earn without their benefit being affected).

Employment and Support Allowance (and Universal Credit for claimants who are not fit for work)

This is a real stinker (in my opinion).

Some background first. Employment and Support Allowance (ESA) is a benefit for claimants who are not fit for work (or, in government-speak, have a 'limited capability for work'). Claimants on this benefit are assessed under the work capability assessment. Those who satisfy this test are then divided into two groups: the work-related activity group (who are expected to participate in activities to help them become more able to move into work) and the support group (who are judged to be too ill or disabled to undertake any activities). Until April, claimants who were placed in the work-related activity group were paid an extra £29.05 (the 'work-related activity component') as well as their standard £73.10 per week: claimants in the support group were paid an extra £36.20 (or, sometimes £51.95).

From April this year new claimants who are placed in the work-related activity group will no longer be entitled to that extra £29.05 (existing claimants will not be affected). The government's justification, insofar as I understand it, is that giving claimants this money encourages them to stay 'on the sick' rather than look for work, and that it's not fair to give them more money than claimants who are on Jobseeker's Allowance and looking for work.

This is not the place for a lengthy critique of this position, but I will make the following observations. Firstly, most claimants of ESA - in my experience - do not choose to be unfit for work, and are not realistically able to comply with all the requirements placed on jobseekers. Secondly, those claimants who really should be looking for work will generally find it hard to stay on ESA: it's hard enough for claimants who definitely shouldn't be looking for work. Thirdly,  the extra amount was included in the original rules because it was thought that people with health problems and disabilities generally have additional expenses that the healthy and able-bodied do not have.

And finally, there's a very obvious injustice. Claimants on Jobseeker's Allowance who are also in receipt of Disability Living Allowance or Personal Independence Payment are entitled to an extra £32.55* per week: this is called the 'disability premium'. This was left out when the rules for ESA were drawn up, presumably because the extra amounts paid to claimants in the work-related activity and support groups dealt with this. The work-related activity component has been removed, but the disability premium hasn't been put back in. So a claimant on ESA who also gets Disability Living Allowance or Personal Independence Payment will get £32.25* per week less than if they were on JSA. How can this be fair?

For claimants in the Universal Credit system, there are equivalent changes that have roughly the same effect.

*For couples this figure is £46.40.

Changes to Child Tax Credit (CTC) (and to how children are treated by Universal Credit)

There are two major changes here:

1. New claims for CTC from 6th April will not include the 'family element' - previously £545 per year in the award.
2. There will be no extra amounts paid in respect for third  or further children born on or after 6th April. This applies to both new and existing claims.

People who are in the Universal Credit system will also no longer receive extra amounts for third or further children.

Clearly a key concern here, among others, is that of the impact on these changes on 'non-consensual conception', or what many of us might call 'rape'. Although the law does provide that a claimant will not be affected by this change in these circumstances, this puts a female claimant in the potential position  of having to prove that they were raped. This raises all sorts of questions about privacy, dignity, and burdens of proof. The Social Security Advisory Committee (SSAC) expressed these concerns in a letter to the Minister of State for Employment, but he did not change the rules to address these concerns. You can read the SSAC's letter here:  www.gov.uk/government/uploads/system/uploads/attachment_data/file/590932/ssac-to-damian-hinds-2-child-exceptions.pdf

And finally...

Bereavement Benefits

These have been completely redesigned. The information that follows is a very brief summary of the main points.

Hitherto claimants could apply for a Bereavement Payment - a one off amount of £2,000 - and either:

• Widowed Parent's Allowance - the claimant must be responsible for at least one child , or
• Bereavement Allowance - but this is only payable for 52 weeks, and the claimant must have been 45 years old or more when their spouse died.

All these benefits are dependent on the deceased having paid enough National Insurance contributions. In both cases the amount payable is usually £113.70 per week (but can be less, depending on NI contributions).

From 6th April these are all abolished for new claimants, and replaced by Bereavement Support Payments. 

Claimants who are getting Child Benefit (or pregnant) are entitled to monthly payments of £350 for 18 months, and an additional first payment of £3,500 in the first month.

Other claimants are entitled to monthly payments of £100 for 18 months, and an additional first payment of £2,500 in the first month.

There are some advantages to the new scheme: payment is no longer dependent on the deceased spouse's NI contributions, and claimants do not have to be at least 45 years old when they were bereaved.

On the other hand, the ongoing payments are much less (roughly equivalent to  £80.77 and £23.08 per week), and the payments to claimants with children are now time limited. Under the previous scheme, a claimant who was bereaved 10 years before their final child grew up might be entitled to Widowed Parent's Allowance totalling very roughly £60,000 over that time. Under the new rules the same person would only get £9,800 (including the initial extra payment of £3,500).

A question about tax credits

I recently received this query about tax credits and self-employment. With the person's agreement I have answered his questions as this public post. Both the person's name and some non-relevant information have been changed.

'I was receiving Self Employed Working Tax Credits for 3 years after claiming Jobseeker's allowance before that. I was earning an insufficient amount to make my situation sustainable so I moved onto Universal Credit in June.  In December I received a letter from HMRC re my tax credits award for the tax year 2014-15 with a 30 part questionnaire. I am nervous about how exactly I should answer some of these questions. If unhappy with my level of activity are HMRC likely to claim all my Tax Credits back? Are HMRC likely to charge me an additional penalty if they consider my activity does not constitute 30 hrs of work and I had not informed them? I know that HMRC changed their approach to Self Employed Tax Credits in April, but I thought this was for new and current claims

"Bill W"'

There's quite a few issues hidden inside this query: I'm going to tease these out and deal with them individually.

1. How does self-employment fit into the tax credit rules (and how did this change in April 2015)?
2. What powers does Her Majesty's Revenue and Customs ('HMRC') have regarding tax credits paid for previous years?
3. What should I do if I get a letter from HMRC's compliance team?
4. What rights do you have if they ask you to pay money back from previous years? 

1. How does self-employment fit into the tax credit rules (and how did this change in April 2015)?

To be entitled to Working Tax Credit you need to be in 'qualifying remunerative work'[1]. The work can be as an employee or as self-employed, but must be done 'for payment or in expectation of payment', and you must normally work at least 30 hours per week, or, for some people, 16 hours per week (for more details about this see www.benefitsowl.info/tax credits.html).

For employed earners showing this is easy enough: clearly for self-employed people it's a bit trickier: it may be hard to show that you're doing work for payment or in expectation of payment if you've only just started. It can also be hard to show how many hours you work.

All the above requirements have been in place since tax credits were invented.

Now let's look at what changed in April 2015.

The main change[2] was to add some wording to Regulation 2 of the Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002. Regulation 2 is a long list of definitions used in the rest of the regulations. The change was to add some words to the definition of 'self-employed'.

• Before April 2015 it said '"self-employed" means engaged in carrying on a trade, profession or vocation;'
• Now it says: '"self-employed" means engaged in carrying on a trade, profession or vocation on a commercial basis and with a view to the realisation of profits, either on one’s own account or as a member of a business partnership and the trade, profession or vocation is organised and regular;'

Who would fit the rules before April 2015 but not afterwards? This would need to be someone who was carrying out a trade, profession, or vocation, and receiving or expecting payment, but wasn't aiming to ever make a profit. For example, someone who was employed for 29 hours per week and then spent an hour each week making and selling jam as a hobby probably wouldn't be able to use the jam-making to bring the hours up to 30.

I suppose the use of the words 'commercial basis' is to rule out cases where there was a profit, but it was   never expected to be more than a trivial amount.

Note that you don't have to be making a profit to fit these rules: you just need to satisfy the authorities that you are aiming to make a profit eventually. 

As far as I can work out the change cannot be applied retrospectively (in other words, your activity shouldn't have to satisfy these rules before the rule change came in), although if someone was on Working Tax Credit before April 2015 they would have to meet the extra requirements from April 2015 onwards. If HMRC does try to apply the change retrospectively that decision should certainly be challenged (see below).

If you want to know more about the change, you might want to look at what the tax credit decision makers' manual has to say about it: http://www.hmrc.gov.uk/manuals/tctmanual/tctm02415.htm. (Note that when it says 'you' it means the decision maker, not you!). You could also look at the following page on the gov.uk website: www.gov.uk/government/publications/revenue-and-customs-brief-7-2015-new-rules-for-the-self-employed-claiming-working-tax-credit

2. What powers does HMRC have regarding tax credits paid for previous years?

As you probably know, tax credits are assessed on an annual basis. After the end of the tax year in early April, HMRC ask you for finalised information about your income for that year: they then issue a final decision: this is technically called a Section 18 decision[3]. As a result of this decision you may find that you have been overpaid, or underpaid, or paid just the right amount, for that - completed - tax year. Normally a Section 18 decision is the end of the matter.

However there are two scenarios in which HMRC can re-assess finalised decisions:

• It has the power to open an enquiry and revise a final decision up to one year after the deadline for the annual review, if it thinks it is necessary[4];  
• It can revise a final decision up to five years from the end of the tax year in question, if the decision was wrong due to fraud or neglect on the part of the claimant, or if a person's income liability was revised[5].

(The deadline for the annual review depends on a range of factors, but cannot normally be later than the first 31st January after the tax year in question ended.)

Unless they suspect fraud or neglect they can only look at the most recent year. If, of course, the investigations into that year suggest that there has been fraud or neglect they can then extend the investigation backwards.

The words 'fraud' and 'neglect' mean aren't defined in the rules: however the former is going to cover deliberate lies and omissions, and the latter is likely to come into play when a claimant simply can't be bothered to inform HMRC of changes, for example.

In practice, these exercises are normally carried out by the infamous compliance department. It's worth bearing in mind that just because an enquiry is started it does not mean that the compliance team are necessarily expecting to find something wrong.

So, if they compliance team ask you for information about the previous tax year, and you provide it (or their deadline to you expires) they could decide that everything checks out OK, in which case that's the end of the story.

Alternatively, they could decide that the Section 18 decision was wrong, and issue a new decision replacing it. This new decision could reduce your award for that year, remove it completely, or increase it (unlikely!). They also have the following options:

• If they reduce or remove your award, this will have the effect of creating an overpayment which they will ask you to pay back;
• If they think you have acted fraudulently or negligently, they can also: 
• impose a penalty of up to £3,000[6];
• open up the enquiry to cover previous years, up to the five year maximum.

They may decide that you were not actually in 'qualifying remunerative work', but also that you've not done anything wrong enough to count as fraud or neglect. If this is what they decide they cannot issue a penalty or investigate previous years. 

3. What should I do if I get a letter from HMRC's compliance team?

The obvious answer to this question is just to say that you need to respond to it, giving them any information they ask for. But there are some other things worth saying.

If you don't respond to the request for the information, or miss their deadline, you will still have opportunities to pass on information in the future. They will make a decision based on what they do know, but you will then have the write to ask them to look into the matter again (see below) and if that doesn't work you will have the right to take the case to an independent tribunal (ditto).

So if you're really struggling to give some information, or are reluctant to do so, that's OK. On the other hand, if there is information or documentation that supports your position, send it.

Here's some more guidelines:

• You'll probably notice that some of the things they are for in the letter are not relevant to you (it might ask for P45s, which will be irrelevant if you've not worked as an employee): this  is not surprising as the letter you're sent is likely to be a generic one. Remember that, for all they know, you were, say, an employee for part of the time, but didn't tell them.
• If there is information you think might be helpful but they haven't asked for, by all means include this. For example, you could talk about difficulties you faced in your self-employment, and explain how you came to your decision to move from tax credits to Universal Credit.
• Whatever you do don't guess, or even worse, invent, information, just to get your reply complete.

Once you send your reply in, they may send you further requests for information before they make their final decision. If you're worried this is going to drag on and you have nothing else to say, reply to them saying this, and asking them to make a decision. If they fail to do this, complain.

4. What rights do you have if they ask you to pay money back from previous years? 

• If HMRC makes a decision that you were previously awarded the wrong amount, you have the right to challenge that decision. 
• If HMRC decided to impose a penalty, you have the right to challenge that decision (against both the existence and the size of the penalty).
• You don't have the right to challenge the overpayment itself, but this doesn't matter because the overpayment is dependent on the decision changing the amount of the award, and this can be challenged.

If you want to challenge either a new entitlement decision or a penalty decision, or both, there is a two stage process:

1. You must first ask HMRC to look again at their decision: this is called 'asking for a mandatory reconsideration'.
2. If this does not resolve the matter, you have the right to appeal to an independent tribunal.

For more details about how to do these, check out http://www.benefitsowl.info/TCopay4.html.

At both stages, it's important to be clear about what you are disagreeing with, being careful to match this with the decision you are seeking to challenge:

• If HMRC hasn't accused you of fraud or neglect but is simply saying that what you were doing doesn't count as qualifying remunerative work, don't waste time saying you haven't been fraudulent or neglectful, instead say why what you were doing should count;
• If they are accusing you of fraud or neglect, look exactly at their reasons for saying this (if they give clear enough reasons), and respond to these point by point;
• If they are imposing a penalty, make sure you make clear that you are challenging this as well.

I said earlier in this post that I didn't see how they could apply the April 2015 change to previous years. If they do try this, make sure you make it clear at both stages that you believe that this is unlawful. (If they are trying to do this, this should be clear because the words from the change should appear somewhere (i.e. 'on a commercial basis and with a view to the realisation of profits, either on one’s own account or as a member of a business partnership and the trade, profession or vocation is organised and regular').)

HMRC may propose to you that you agree some settlement with you: I have previously seen letters which seemed to be urging claimants against taking their cases to tribunals. Be very careful about accepting such proposals. You ultimately have the right to have your case heard by an independent body if that is what you want. If you have difficulty getting them to issue a formal response to your request for a mandatory reconsideration you should complain.

Ultimately, cases like this are decided 'on the balance of probability'. It may not be possible for you to prove you were in qualifying remunerative work: but it may also not be possible for HMRC to prove that you weren't. A tribunal will need to consider and weigh all the evidence, including your testimony and how you come across at tribunal.

Summary

To be entitled to working tax credit you need to be in 'qualifying remunerative work': this normally means working enough hours, and as well as this, for self-employed people, you need to be means engaged in carrying on a trade, profession or vocation.

Since April 2015 self-employed claimants will need also need to show that the work is on a commercial basis and with a view to the realisation of profits.

It is hard to see how the April 2015 change can be applied to tax credits paid before April 2015.

HMRC have the right to re-open tax credits award up to one year after the deadline for the final review.

HMRC have the right to change decisions going back up to five years in cases of fraud or neglect.

If their compliance team writes to you, you should respond, but be aware that you will have the opportunity to supply further information if you need to challenge their decision.

You have the right to challenge an HMRC decision to reduce an award, or to impose a penalty. You need to ask HMRC to look at their decision themselves first (mandatory reconsideration) but if that does not succeed you have the right to take your case to an independent tribunal (appeal).

If HMRC does not progress your case properly you have the right to complain.

Ultimately your case must be decided on the balance or probability. Just because you cannot provide conclusive proof of something it doesn't mean that you are not telling the truth, and HMRC and the tribunal need to take this into account when they consider your case.

Information sources

[1] Regulation 4 of the The Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002: http://www.legislation.gov.uk/uksi/2002/2005/regulation/4/made
[2] The Working Tax Credit (Entitlement and Maximum Rate) (Amendment) Regulations 2015
[3] Tax Credit Act Section 18: http://www.legislation.gov.uk/ukpga/2002/21/section/18
[4] Tax Credit Act Section 19: http://www.legislation.gov.uk/ukpga/2002/21/section/19

[5] Tax Credit Act Section 20: http://www.legislation.gov.uk/ukpga/2002/21/section/20
[6] Tax Credit Act Section 31: http://www.legislation.gov.uk/ukpga/2002/21/section/31

Chancellor's Autumn Statement - first the good news...

Let's look at the most talked about issue first: tax credits

Newspaper headlines excitedly reported the chancellor's annoucement in words like these: 'Tax credit cuts SCRAPPED in victory for working families' (www.mirror.co.uk, for example). Unfortunately the news, while good, is not that good (in fairness, later media consideration was more nuanced).

So what proposals has the chancellor reversed?

In my post of 13th July, I set out the proposed changes to tax credits as follows:

Changes to tax credits for new and current claimants The income taper will be increased from 41% to 48% of gross income: in other words, for every pound over the threshold figure the claimant's tax credits will be reduced by 48p, rather than 41p (before 2011-12 it was 39%); The threshold figure (see previous bullet point) will go down from £6,420 to £3,850: this means that any income over £3,850 will be taken into account now; The income rise disregard will be reduced from £5,000 to £2,500 (at present, a claimant's income can rise by up to £5,000 during a tax year without affecting amount of tax credits paid for that year - this will change to £2,500); No child element will be paid in respect to third (or additional) children born after April 2017. There will be exceptions for multiple births and disabled children. Compared to 2015-16 figures, this will reduce the maximum annual entitlement by £2,780 per child; The powers available to HMRC to recover overpayments will be widened. Changes to tax credits for new claimants only The family element (currently worth £545) will no longer be included for families whose first baby is born in April 2017 or later (I suppose this could also apply to existing claimants of Working Tax Credits only, but who don't start a family until April 2017).

The U-turn is in respect of the first two bullet points only. The income a claimant* can receive before their tax credits is reduced will stay at £6,420, and any income they have above that figure will reduce entitlement by 41p in the pound, not 48p as was proposed.

That's great, and I don't want to poo-poo the acheivements of everybody, including myself (and the House of Lords) in effecting this change. But the other provisions remain:

• The amount a claimant's income can rise before their tax credits are affected is still being reduced by £2,500 compared to the current disregard: this could result in a claimant being £1025 worse off over a year compared to their position under the old rules.
• Entitlement calculations will still not take acount of any children born from April 2017 onwards
• The family element, curently worth £545 per year, which is currently included in the calculation or all clients will families, is still being removed for new claimants from April 2017 onwards
• The powers to recover overpayments will still be widened.

Furthermore, tax credits payment rates, like those of most other social security benefits, were frozen in the budget: There will be no inflationary increase in April 2016, April 2017, April 2018, and April 2019.  The Autumn Statement reports at Section 2.2 that earnings are currently rising at about 3% and are expected to reach 3.9% by 2020. Clearly this is good news for those who are working, and, if their benefit income becomes a smaller proportion of their overall income over time, this looks like meeting the stated aim of the tax credit changes.

However tax credits are not just paid to people who are working: anyone who has children of school age or younger relies on Child Tax Credit if they have a low income. For these claimants there is no good news here.

And, even for those famous 'hard-working families', there is another problem on the horizon...

Universal Credit 

It's not happening as fast as Iain Duncan-Smith planned, but Universal Credit is inexorably spreading across the land. It is designed to replace all the means-tested benefits (except Council Tax Support) including tax credits. This means that gradually more and more people with children (for example) will be getting Universal Credit, not Tax Credits. And the changes that the Chancellor announced in the Budget are not being reversed.

In the Universal Credit system, the amount a claimant can earn before their Universal Credit is affected is called their 'work allowance'.  It therefore parallels the 'threshold figure' in the tax credit system. It differs in that only earned income is ignored, and in that there is a range of different work allowances according to different specific circumstances. In the budget many of these allowances were reduced. Let's see how this might pan out.

If you read my 13th July post, you'll remember Alex and Hilary. They have three children. Alex works 35 hours per week, and earns the national minimum wage (which becomes the national living wage from April 2016). To keep things simple, they've got no housing costs - perhaps they live in a relatives house.

As you can see from the table below, they benefit from the chancellor's u-turn if they're in the Tax Credit system: in fact their overall income rises slightly because of the national living wage, But if they're in the Universal Credit system things are very different. Because the work allowance was reduced in the Budget (for a couple who are both fit for work and have children, it changes from £123 to £91 per week), they see a reduction close to the one they would have faced had they been getting Tax Credits and the Chancellor hadn't changed his mind.

(all payment figures are per week)	TC system March 2016	TC system April 2016 before U-turn	TC system April 2016 now	UC system March 2016	UC system April 2016
Net earnings	£219	£230	£230	£219	£230
Child Benefit	£48	£48	£48	£48	£48
Working Tax Credit	£49	£6	£39
Child Tax Credit	£170	£170	£170
Universal Credit				£233	£184
Total Income	£485	£455	£488	£490	£462
Compared with first column		-6%	+1%	+1%	-5%
Out of work benefits	£333	£333	£333	£333	£333

And finally, more bad news for tenants of social landlords...

In the Autumn Statement the chancellor a change to Housing Benefit for these people. From 1st April 2018, Housing Benefit payments will be capped in the same way that they are for tenants in the private sector.

Perhaps this needs some explanation. Currently, if you rent from a social landlord, the maximum Housing Benefit you can get is equal to the rent your landlord charges you (minus the bedroom tax, of course, if you are considered to have more bedrooms than you need). However, if you rent privately, The maximum Housing Benefit  you can get is not related to the rent the landlord charges, but to a set of figures set locally, dependent on your age, the size of your household, and the location. From April 2018 this same principle will apply to social housing tenants who took out their tenancies on or after 1st April 2016.

You might say, as Osbourne does, that this move levels the playing field for private tenants versus those  of social landlords. Well yes, that's true, although it's a pity - though not surprising - that the field has been levelled by digging into the high side...

Alternatively, you might also say if you are a bit more cynical) that this change simply completes the work that the bedroom tax started, in reducing the security for tenants of social housing.

If you were even more cynical, you might see this move as consistent with other changes, such as allowing the right to buy, that indicate a doctrinaire opposition to the concept of social housing.

I couldn't possibly comment.

Additional Information

If you want to check out the Autumn Statement yourself, you can find it here:

https://www.gov.uk/government/publications/spending-review-and-autumn-statement-2015-documents/spending-review-and-autumn-statement-2015#security-and-opportunity-for-families

For more information about Universal Credit, see  www.benefitsowl.info/universal%20credit.html

*For a joint claim this should be read as 'claimants' here and elsewhere: the two memebers of a couple don't have separate income allocations

The figures in the table were drawn from the spreadsheet of which the figure below is a screen grab.

The Budget and Benefit: Part 2 - some thoughts

In my last post, I laid out the basic information about the proposed changes. In this post I try to flesh out some of detail. I will look at the impact on some claimants, and express some opinions.

Some concrete examples

First of all, let's look at some concrete examples of how the changes might affect people. I'm not going to express any opinions here: the figures speak for themselves.

Low-paid workers with children, and out of work couples with children

Alex and Hilary have three children. It's March 2016. Alex works 35 hours per week, and earns the national minimum wage, 6.70 per hour (it is already scheduled to increase from £6.50 in November 2015. They would also normally receive £48.10 per week Child Benefit (which isn't going to rise for four years).

Let's look at how Alex and Hilary's situation develops:

• In April 2016 Alex starts to receive the national minimum wage of £7.20 per hour: however the income threshold for the tax credit calculation is reduced from £6420 to £3850, and the rate at which income exceeding the threshold is increased from 41% to 48%;
• In April 2017 the national living wage is increased: from the budget statement this looks likely to be to about £7.75.

Here's a summary of how the changes pan out. (the full calculations are available at the end of this post, in case you're interested, as are the assumptions I've used). I have also included the equivalent out of work benefit payable for comparison. For simplicity, I've not included rent or mortgage costs, and all amounts are rounded to the nearest pound.

	March 2016	April 2016	April 2017
Net earnings	£219	£230	£243
Child Benefit	£48	£48	£48
Working Tax Credit	£46	£6	£0
Child Tax Credit	£170	£170	£168
Total income	£483	£455	£460
Change		- 6%	-5%
Out of work benefits	£333	£333	£333

Now let's look at two other couples:

• Jo and Jean situation is the same as that of Alex and Hilary, in every way except one: their third child is born after the start of April 2017.
• Ali and Jay do not make any claim for tax credits until after the start of April 2017

Here's a comparison of what each couple are likely to get in April 2017:

	Alex and Hilary	Jo and Jean	Ali and Jay
Net earnings	£243	£243	£243
Child Benefit	£48	£48	£48
Working Tax Credit	£0	£0	£0
Child Tax Credit	£168	£115	£105
Total income	£460	£406	£396
Out of work benefits	£333	£280	£270

So if, for example, your third child is due to born in March 2017 but actually emerges in April you stand to lose about £54 per week (about £2800 per year).

You will also notice that an out of work couple with three children who make their first claim for benefits after the start of April 2017 will receive more than £60 less than an equivalent couple would have got before the rules changed, a reduction of around 20%, or £3,276 per year

Low paid worker without children, Universal Credit system

Ahmed single, has no children, and is looking for work. He is on Universal Credit.

Remember that one of the selling points of Universal Credit was that it made the transition into work easier, and made it more worthwhile working. A person on income based Jobseeker's Allowance is, at best, £5 per week better off, no matter how much they earn. If they were on Universal Credit, a specified amount of earnings are ignored: any earnings that exceed this reduce Universal Credit payments by 65p in the pound.

The problem is that, although the amount of earnings ignored for a single, childless, adult, is £111 per month (about £25.54 per week), from April next year it will be zero.

So this is what things look like for someone like Ahmed...

Mmm...
As you can see, for earnings up to about £25 per week, and above around £100 per week, the changes  remove any real advantage gained by introducing Universal Credit in the first place. Between those figures the post-budget version of UC effectively splits the difference. The maximum difference between the JSA rules and the post-budget UC rules is about £21 (and applies to earned income of £80).

Now here's the thing. The earnings disregard has been around for quite a while: Income Support - on which the rules for income based JSA and income related ESA are based - was invented in 1987, and the disregard was £5 then. It hasn't moved. If it had increased in line with inflation it would now be about £12.56. So the best that Universal Credit can offer compared to Income Support at its inception is an £8 per week increase.

For a wider analysis of the financial impacts of the changes, I strongly recommend the following (pdf) presentation by the Institute of Fiscal Studies (IFS): http://www.ifs.org.uk/uploads/publications/budgets/Budgets%202015/Summer/Hood_distributional_analysis.pdf.

The IFS predicts, amongst other changes, that changes to the tax credit work allowances will result in 'just over 3m families losing an average of just over £1,000 per year'.  It also notes that the freeze in benefit rates will result in a cut in real terms of 8% between 2013 and 2020.  And if you are in any doubt of the regressive impact of this and the previous government's policies, check out the graphs on the impact of government policy by income (copyrighted, so not here, but there about half way through).

Other observations

This is where I start to let my opinions show a bit more.

The 'National Living Wage'

The introduction by the government of an official 'National Living Wage' (NLW) is, from one perspective, a stroke of genius. By appropriating the term 'Living Wage' the ground is taken from under the feet of campaigner for a living wage: we've got it now, haven't we?

Well: have we? Not quite. The NLW is set at £7.20 for the year April 2016. The Living Wage Foundation sets the following rates for the previous year (i.e. this year) at £7.85 outside London, and £9.15 within London. So the NLW is less than the campaign's living wage: considerably less if you live in London.

The budget statement has a graph (on page 33) showing how the NLW is projected to increase compared with what the minimum wage would have been if it had continued. However it is a bit misleading, as it employs that ever useful trick, the non-zero y-axis. So here's my version...

I don't know about you, but that doesn't really look like a game changer to me.

And, if you're not yet 25, you don't benefit from it at all.

So that's why I put it in 'scare quotes': it's not really a living wage at all, just a rebadged and slightly increased minimum wage.

Removal of extra help for third and subsequent children

I've already discussed this at length in my previous post, possible-reductions-to-tax-credits, and I haven't got much to add here.

However, there's one little detail that needs noting. At paragraph 2.103 of the budget statement, the chancellor says: 'The Department for Work and Pensions and HMRC will develop protections for women who have a third child as the result of rape, or other exceptional circumstances'.

There's clearly a problem here: a woman who has a child as the result of rape will need to prove that she has been raped in order not to be penalised for having the extra child. How will she do that? The Guardian notes that Alison Thewliss, SNP MP for Glasgow, has raised this matter, asking, for example: 'How are you going to prove it? What if there is no conviction [for the rape] as happens in a lot of cases?...What happens if it becomes known in the local community that a woman is receiving tax credits for a third child? What assumptions will be made about that woman and her children?'

Keir Starmer raises a wider question (as comment in The Guardian): 'What about mothers who have a third child because of ongoing abuse within the relationship?' As he goes on to note: 'Power lies at the heart of most domestic abuse, and that includes power over sex, when to have children and how many'.

As it happens, I'm not completely unsympathetic to the government's wish to disincentive large families. However any change needs to be brought in via a much subtler tool than this one, and one that doesn't produce such problematic consequences.

Young people

What have young people done to deserve their treatment by the Chancellor? They will normally now not be entitled to any help with rent between the ages of 18 and 21, and will have extensive extra requirements placed on them if they want to carry on getting Jobseeker's Allowance or Universal Credit. They will be expected to participate in 'an extensive regime of support' from the outset of their claim: obviously 'support' here is a weasel word, which translated means 'hurdles, obstacles, meaningless check-box exercises, and opportunities for losing benefit'.

I can only assume that they are being targeted because, as generalisation, and as a result of disenchantment with conventional politics, they are relatively unlikely to vote. If the young start ever voting in significantly greater numbers, the government better beware!

And finally, that 'Merry-go-round'...

Before the budget was unveiled, the BBC reported the Chancellor as saying that 'the low paid would be compensated by tax cuts in an effort to end the "merry-go-round on which people pay their taxes and then get back benefits" and firms would be encouraged to pay higher wages'.

There are two different issues conflated here.

The first is the assertion that claimants are being taxed on the one hand, and then receiving tax credits and benefits on the other, and that this is ridiculous. This argument is disingenuous: a person on the NLW will be receiving paying very little tax anyway. There is no 'merry-go-round' here, except insofar that richer people pay tax which then helps poorer people: I may be naive but I regard that as a Good Thing.

The second issue is the - legitimate - concern that tax credits are, in effect, subsidising employers. However the implication that, by reducing tax credits, employers will increase wages to balance this, is unconvincing. So unconvincing that the government never quite says this.

So the working poor will see their income reduced, and the wealthy will be able to carry on making money. And as for the non-working poor: who cares what happens to them? You do. I do. But who else?

Appendix - details of calculations 

Bank of England inflation counter: http://www.bankofengland.co.uk/education/Pages/resources/inflationtools/calculator/flash/default.aspx

The Budget and Benefits: Part 1 - the changes summarised

In last week's budget social security was centre stage, as reducing benefit expenditure seems to be the government's preferred route for deficit reduction. George Osborne's target is to reduce annual welfare expenditure by £12billion, although his initial target for fulling achieving this of 2017-18 has been delayed to 2018-19.

But what are the details? It's easy to lose these in all the political and media spin: some changes have been given greater prominence while others have been largely ignored. I've tried to lay out all the main changes here. I've also included some things, such as the 'living wage' and changes  to social housing rents, which are not benefits but are likely to have a significant impact on many claimants.

You can look at the details for yourself. The government has published the Summer Budget 2015 here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/443232/50325_Summer_Budget_15_Web_Accessible.pdf. Most of the benefit related changes appear in the section headed 'Rewarding work and backing aspiration' (sigh).

In an attempt to keep this to a manageable length:

1. All changes come into effect in April 2016 except where otherwise specified;
2. Changes to Universal Credit that simply mirror changes in other benefits are marked '[& UC]'. 

General

• There will be no inflationary increase in April 2016, April 2017, April 2018, and April 2019. The following are exempt from this freeze:
• disability, carer, and pensioner related  benefits, elements and premiums;
• Statutory sick pay, maternity pay, etc.

Changes to tax credits for new and current claimants

• The income taper will be increased from 41% to 48% of gross income: in other words, for every pound over the threshold figure the claimant's tax credits will be reduced by 48p, rather than 41p (before 2011-12 it was 39%);
• The threshold figure (see previous bullet point) will go down from £6,420 to £3,850: this means that any income over £3,850 will be taken into account now;
• The income rise disregard will be reduced from £5,000 to £2,500 (at present, a claimant's income can rise by up to £5,000 during a tax year without affecting amount of tax credits paid for that year - this will change to £2,500);
• No child element will be paid in respect to third (or additional) children born after April 2017. There will be exceptions for multiple births and disabled children. Compared to 2015-16 figures, this will reduce the maximum annual entitlement by £2,780 per child; [& UC];
• The powers available to HMRC to recover overpayments will be widened.

Changes to tax credits for new claimants only

• The family element (currently worth £545) will no longer be included for families whose first baby is born in April 2017 or later (I suppose this could also apply to existing claimants of Working Tax Credits only, but who don't start a family until April 2017). [& UC]

Employment and Support Allowance

• For new claimants after April 2017 there will be no work-related activity component (currently £29.05). At present, after the initial assessment period, claimants  who are assessed as being potentially able to work in the future will usually receive £102.15 per week. New claimants affected by this rule will only receive £73.10 per week. [& UC]

Housing Benefit and social housing rents

• Backdating will be limited to a maximum of four weeks (compared with a possible maximum of up to six months currently, in some circumstances);
• For new claimants, or current claimants who start a family, there will be no family premium (currently worth £17.45 normally); [& UC]
• There will be no personal allowances for children amounts in the Housing Benefit calculation to take account of third (or subsequent) children born after April 2017 (the same exceptions apply as for tax credits child elements); [& UC]
• Social housing rents will decrease by 1% a year for four years;
• Social housing tenants whose income exceeds £30,000 (£40,000 in London) will be required to pay a market rent, or near market rent (although as words in this section include 'consult', 'set out the detail', and 'due course', suggest that the timetable for this change is uncertain).

Mortgage Help (applicable to most means-tested benefits)

• Claimants will normally have to wait 39 weeks before mortgage help begins (in fairness, the current 13 week wait was applied as a recession related provision, and was always intended to be temporary;
• From April 2018 mortgage help will become a loan, repayable when the claimant sells the house or begins work.

Universal Credit

• The amount people will be able to earn before their benefit is affected (the work allowance) will be reduced: For childless, non-disabled, claimants, the work allowance will go down to zero (currently £111 per month): for other claimants it will go down to £397 per month for those with no housing costs (compared to between £536 and £734 now) and to £192 per month for those with housing costs (compared with between £192 and £263 now);
• Various changes are to be made reducing amounts for families with children. These mirror those applied to other benefits;
• From April 2017 there will no longer be an extra amount payable for claimants who have limited capability for work and are in the work related activity group;
• The work-related requirements placed on parents of young children will become stricter from April 2017. This is a bit tricky to explain. For simplicity, imagine you are a single parent of a child:
• Currently, no requirements are placed on you until your youngest child is one year old. Then, until your child is three, you have to attend work-focused interviews. From the child's third birthday until they are five you also under work-preparation activities as well. Once your child is five, you have to be available for work;
• From April 2017 there are no changes until the child is one. However, you will now have to undertake work-preparation activities once the child is two, not three, and will be expected to look for work when they are three, not five.

Childcare 

• From September 2017, working parents of 3 and 4 year old children will be entitled to 30 hours of free childcare (compared with 15 hours currently).

Benefit Cap

• The Benefit cap, which sets a limit on the total amount of benefits a household can receive, will be reduced from £26,000 to £20,000 per year outside London, and to £23,000 within London. 

Changes affecting young people 

• From April 2017, 18 - 21 year olds will not normally be entitled to help with their rent (as part of Universal Credit - Housing Benefit is supposed to have been phased out by 2017). There are exceptions, including 'vulnerable' young people, those who may not be able to move back with their parents. Young people who have been working and living independently will also be able to get help with their rent, but only for six months;
• From April 2017 18 - 21 year olds on Universal Credit will be expected to participate in 'an intensive regime of support' from the outset of the claim. After six months they will be expected to apply for an apprenticeship or traineeship, go on a work placement, or 'gain work-based skills'. All this is known as the 'youth obligation';
• 18 - 24 year olds will not be entitled to the 'Living Wage'.

The 'Living Wage' (in my next post I'll justify my use of 'scare quotes' around this term.)

• From April 2016, this will be set at £7.20, compared with the £6.50 national minimum wage currently (due to rise to £6.70 in September 2015);
• It is intended that it reach at least £9 (60% of median earnings) by 2020.
• It will not apply to workers who are younger than 25.

In my next post, due soon, I'll give some examples, and offer some opinions...

Main Sources

The Summer Budget 2015: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/443232/50325_Summer_Budget_15_Web_Accessible.pdf
The resultant Welfare Reform and Work Bill: http://www.publications.parliament.uk/pa/bills/cbill/2015-2016/0051/cbill_2015-20160051_en_1.htm

Possible reductions to tax credits

An e-mail popped into my inbox today from the campaigning group, 38 Degrees: George Osborne: No more kids in poverty. Please don't cut child tax credit I decided I need to have closer look.

The issue has been covered extensively in the media:

Tory welfare cuts would hit poorest third of UK families, research shows:
http://www.theguardian.com/politics/2015/jun/14/tory-welfare-cuts-would-hit-poorest-third-of-uk-families-research-shows
Cameron to hint at assault on tax credits in welfare speech: http://www.theguardian.com/money/2015/jun/22/cameron-hints-at-assault-on-tax-credits-in-welfare-speech
George Osborne considering £5bn cuts to child tax credits: http://www.bbc.co.uk/news/uk-politics-33089711

What is being proposed?

The proposal is to 'return the per-child element of child tax credit to its real CPI-adjusted 2003/4 level' [1]. But what does that mean in practice?

First, some basics.

• Working Tax Credit is available if you are in full time work (as defined by tax credits regulations), provided your income is low enough. 
• Child Tax Credit is available if you have children, again provided your income is low enough. 
• If you are in full-time work and have children you are potentially entitled to both. 
• If you (or your partner) are in full time employment, have at least one child, no child care costs, and provided no-one in the family is disabled, the maximum Working Tax Credit you can normally get is £4,780 (in the tax year 2015-16), and the maximum Child Tax Credit you can get is normally £545 plus £2,780 per child (the 'child' element). 
• So if you have two children the maximum total tax credit figure is £10,885 (£4,780 plus £545 plus two lots of £2,780)
• What you actually receive is then reduced by 41% of any income you have over £6420.

The government is proposing reducing the amounts for children. The figure of £2780 per child would be reduced to about £1935. They get this by taking the actual figure used in 2003-4 and then increasing it in line with the consumer price index (the increases have presumably been higher than the CPI in the past in an attempt to reduce child poverty).

What's the government's rationale? And what do I think about their logic?

1. If you support workers with in-work benefits you are, in effect, subsidising the businesses that employ them.
2. This is a Bad Thing
3. To remove this anomaly you reduce in-work benefits: workers' pay will increase accordingly
4. The best in-work benefit to cut is the child element of tax credits.

Part (1) is indisputable. Part (2) is arguable either way. 

Part (3) is that bit I, and, I suppose, most of the readers of this post, find particularly unconvincing. Here's some questions that come to mind:

• What will be the drivers of pay increases? Market forces? Strikes? Employer goodwill?
• Will there be sanctions for employers who don;t increase their wages? (Of course not)
• Will all employers increase their wages, or just some?
• How long will it take for the entire employment world to make good the shortfall (if ever)?

And what about Part (4)? Why pick on the child element? The likely, and logical, reason is that all the other elements of tax credits have been increased broadly in line with inflation since 2003: only the child element has been increased at a higher rate, presumably with the aim of reducing child poverty.

Of course this leads to an obvious objection: won't reducing the child element risk increasing child poverty? Er... Yes. According to the Child Poverty Action Group [2] 1.1 million children were lifted out of poverty between 1998/9 and 2011/12. However they also cite research from 2013 that projected that from 2012-13 child poverty would rise, reaching a 600,000 increase by 2015/16. These figures, which are obviously due for verification any time soon, are  unlikely to take account of the proposed reduction to the child element, as this has only recently been suggested. 

Furthermore, this change would affect all families with children on low incomes, whether they're in work or not (this hasn't been mentioned in the media coverage I've seen so far) A single parent on Income Support with one child under five years old, for example, would see their income reduced by £845 per year too (more than £16 per week). 

Where have they got this idea from?

The government appears to have taken this proposal for a suggestion made by the Institute of Fiscal Studies (IFS): Benefit cuts: where might they come from? [3] It's worth taking a look at.

Reducing the child element of Child Tax Credit is only one of the suggestions made by the IFS. It also highlights that it would be likely to increase child poverty by 300,000, and that, 'in the absence of much-needed clarity from the government on its child poverty strategy (and in particular its attitude towards the supposedly legally-binding 2020 child poverty targets) it is difficult to assess the coherence of such a policy.' 

One of the other suggestions they make is to abolish Child Benefit, and increase tax credits and Universal Credit accordingly so that the poorer are not worse off. The majority of families with children would lose about £1000, but it would be the bottom third (in income terms) who would be protected. 

Both suggestions would, the IFS estimates, save about the same amount of money: about £5Bn

I leave you to ponder the reasons for the government preferred choice.

Conclusion

In his speech today (22nd June) David Cameron said[4]: "There is what I would call a merry-go-round. People working on the minimum wage having that money taxed by the government and then the government giving them that money back - and more - in welfare". These look like weasel words to me: a false equivalency is being presented. What is actually happening is that people on the minimum wage are too poor to be paying much tax anyway. But they do benefit from government assistance  to bring their income to a liveable level. 

Yes, it would - probably - be better if those at the bottom of the pile were earning more, and didn't need government assistance. But they aren't, and I can see no way in which a reduction in tax credits will lead to a prompt and universal increase in earnings. It's not even as if the Conservative party has given more than lip service to the Living Wage.

(The Daily Telegraph has published a surprisingly thoughtful article: David Cameron wants to cut in-work tax credits, and wants companies to pay staff more. How can he do it? I don't agree with all their suggestions, but it's a useful contribution to the debate.)

So, yes, I'm signing the petition. You might choose to.

But beware: if this cut doesn't become law, another one will...

References

[1] 'George Osborne considering £5bn cuts to child tax credits' http://www.bbc.co.uk/news/uk-politics-33089711

[2] Child poverty facts and figures http://www.cpag.org.uk/child-poverty-facts-and-figures

[3] Benefit cuts: where might they come from?  http://www.ifs.org.uk/publications/7762

[4] Report by independent on David Cameron's speech, 22/06/2015 http://www.independent.co.uk/news/uk/politics/working-poor-set-to-face-cut-in-tax-credits-as-david-cameron-attacks-merrygoround-welfare-system-10335820.html