Osborne ponders how to square figures

George Osborne has various options to compensate for the loss of the tax credit savings he had planned. Picture: Getty
George Osborne has various options to compensate for the loss of the tax credit savings he had planned. Picture: Getty
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Autumn statement clouded by tax credit aftermath, says Jeff Salway

Low-income workers across Scotland will find out next week how the UK government proposes to water down tax credits cuts that could hit 250,000 families north of the Border.

The chancellor will use Wednesday’s Autumn Statement to set out revised plans for an overhaul of tax credits after being forced by the House of Lords to soften the impact of the changes.

The proposals rejected by peers would affect between 200,000 and 250,000 families in Scotland, according to analysis by Holyrood, while new TUC analysis shows that the average household claiming working tax credits in Scotland would be £1,370 worse off.

The proposed changes are mainly to working tax credits, which are payments aimed at supporting low income families. The basic amount starts at £1,960 a year, though it can be more (or sometimes less) depending on circumstances (such as hours worked and number of children).

The full working tax credit is paid to anyone earning less than the lower threshold of £6,420 a year. The changes announced in July would see that threshold fall to £3,850 (meaning anyone earning above that will get less support). Once the threshold is reached the rate at which the payments are reduced would increase from 48p in the pound rather than 41p, under the legislation set out by the government. At the same time the amount of additional income a claimant could earn in a year without losing tax credits would be halved to £2,500.

Those plans would result in some 3.3 million UK families losing an average of £1,300 next year, the House of Commons library has estimated.

The Treasury was forced into a rethink when the House of Lords last month voted to delay the changes until it found a way of compensating low earners.

The revised proposals should be set out in the Autumn Statement on Wednesday. So what can we expect?

Gwyneth Scholefield, human resources services director at PwC in Scotland, said: “The most obvious response would be to slow down the changes, or for tax credits for the lowest earners, say those earning less than £15,000 a year, to be protected from cuts.”

This is the measure that Osborne is expected to favour. But phasing in the changes would still leave the vast majority of affected families worse off, said the Resolution Foundation, which dismissed it as a “fudge”.

Even allowing time for a higher minimum wage and lower taxes to take effect would do little to reduce the number of households losing out to tax credit cuts, it said.

The think tank suggested several alternative ways for the government to secure the £4.4bn savings it insists on making.

They include increasing the tax free personal allowance in line with inflation, rather than accelerating it towards £12,500. However this does nothing to help the lowest earners.

Similarly, the government could slow down the rate at which the higher rate income tax threshold is set to increase over the coming years.

Reversing proposed changes to inheritance tax (IHT) is another option, as the emergency Budget included a thresholds increase that benefits the most affluent families at a time when those on the lowest incomes are being squeezed.

The government could also reduce spending on tax reliefs over the next five years, taking them back to the 2010 levels. This would reduce the UK government’s £100bn outlay on some 1,000 different forms of relief by around £10bn, the Resolution Foundation estimates.

But none of the proposals aimed at softening the impact of the changes would made a significant difference to those affected, warned David Finch, its senior economic analyst.

“If the government is serious about providing more help to working families, its only option is to reverse the cuts,” he said.

“Fortunately there are plenty of ways to fund this move – such as cancelling tax cuts targeted at better off households. And with a surplus of close to £12bn pencilled in for the end of the parliament, the Chancellor can afford to cancel the tax credit cuts and still eliminate the deficit.”