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Tax credit U-turn and the Universal Credit

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25 November 2015

The government introduced the welfare cap in the 2014 Budget.  The cap applies to most benefits and tax credits with the exception of the state pension.  In the Summer Budget this year measures were announced that would have significantly reduced tax credits for over 3 million low income families.  These plans were heavily criticised by many MPs and were rejected by the House of Lords.

There has been much speculation about what would be announced by the Chancellor in the Autumn Statement but few expected there to be a complete U-turn on the policy. The expected extra welfare cost to the Treasury is forecast to be £3.4bn for 2016/17, £2.9bn for 2017/18 and £1.7bn in 2018/19.

The transition from the existing tax credits and benefits regime to the Universal Credit regime begins in May 2016.  Some small changes to this regime are expected to generate about £250m annually for the government from 2017/18 thus clawing back a small part of the lost revenue from the tax credit climb down. There will also be further changes restricting Housing Benefits and freezing Pension saving credits which will save a few hundred million of the welfare budget over the next few years.