Welfare

The tax credit crunch: how to limit the losses for low-income families

David Finch
David Finch

Resolution Foundation’s latest analysis of the impact of tax credit cuts explores the effect of Summer Budget changes in 2016 on incomes and incentives, and explores ways to offset the losses.

Key findings

  • Policies on tax, the minimum wage and childcare will make very little difference to the typical tax credit losses faced by families next April
  • Phasing-in the changes will reduce the overnight income shock, but make no difference to the final outcome, with 2.6m households still worse off in 2020 relative to 2016 pre-Summer Budget
  • Transitioning would protect existing recipients, but results in a much slower build up of savings. It also creates a perverse incentive to remain on tax credits and fundamentally damages incentives in UC
  • Funding to reverse the cuts can be secured in a variety of ways. Using funds earmarked for future tax cuts to reverse the tax credit cuts would be both progressive and good for incentives

Further reading

In credit?
Assessing where Universal Credit’s long roll-out has left the benefit system and the country
·
Alex Clegg
Happy new tax year
Six big changes to pay, tax and benefit policy – and how they affect households across Britain
·
Torsten Bell, Adam Corlett, Alex Clegg
Pensioner progress
The impact of personal tax and benefit changes since 2010 on pensioner families
·
Mike Brewer, Alex Clegg, Lalitha Try
David Finch
David Finch