Crash Bang Wallop indeed! IncomeMAX looked on in fascination today as the Chancellor of the Exchequer George Osborne announced plans to make serious cuts to benefits and tax credits payments in order to find £11 billion worth of welfare saving.

So, what exactly are the plans? And what will this mean for the great British public?

Families with children are the hardest hit in the proposed reforms. Child Tax Credit and Working Tax Credits are to be completely reformed, with a number of changes made. But there are lots of other changes affecting disabled people, lone parents, pensioners, jobseekers and those requiring support for rent/housing costs.

Here are the main changes:

People claiming Tax Credits

  • The second income threshold currently used to calculate and award the family element of Child Tax Credit (presently £545 per year) for higher earners will reduce from £50,000 per year to £40,000 from April 2011. Then in April 2012, the family element of Child Tax Credit will be withdrawn immediately after the child element(s) when calculating tax credit entitlement (so the £40,000 limit should in effect only last for one year basically - after that the family element will be subject to the same tapering rules as all the other Child and Working Tax Credit elements).
  • The family element will also now taper away using the new universal Tax Credit withdrawal rate of 41% (increased from 39% currently) from April 2011.  
  • The Child Tax Credit baby element (currently £545 per year) which is paid when children are under one will no longer exist from April 2011. 
  • Within Working Tax Credit, the 50 plus element will be removed from April 2012. 
  • At present, HMRC use an income disregard of £25,000 when calculating entitlement to tax credits (meaning they can ignore income increases of up to £25,000 from the current tax years’ income when calculating your entitlement). This disregard will be lowered to £10,000 for two years from April 2011 and then to £5,000 from April 2013. This could mean a return to the bad old days of Tax Credits overpayments (which the £25,000 disregard was designed to eradicate).  
  • The government also plan to introduce an income disregard of £2,500 for falls in income from April 2012. I must be honest and say I’m not 100% on what this actually means. My worry is that it could mean that if your income falls by up to £2,500 HMRC will not adjust your Tax Credits payments. This is something of a concern but we’ll need to see more detail on this before we can comment further.
  • The backdating of Tax Credits will be reduced from 3 months to 1 month from April 2012.  
  • Some good news for low income families with children - Child Tax Credit will see an increase of the child element (currently £2300 per child) by £150 in April 2011 and £60 in April 2012 above CPI indexation.

 Child Benefit

  • Child Benefit, which is universal and NOT MEANS-TESTED will be frozen for three years from April 2011. So you can expect to receive £20.30 for your first or only child and £13.40 for each other child for a while!

Pensioners

  • The Basic State Pension will be uprated by a triple guarantee of earnings, prices or 2.5 per cent, whichever is highest, from April 2011.
  • Pension Credit guarantee credit will match the basic State Pension cash increase in April 2011. 
  • From April 2011 people aged over 60 will qualify for Working Tax Credit if they work for at least 16 hours a week. 

Saving even more dosh on the benefits bill – using CPI not RPI

  • For many years now the government has mainly used something called the Retail Price Index (RPI) to increase the levels of certain benefits. The government will now switch to using Consumer Price Index from April 2011.
  • This SHOULD mean that many benefit payments will not rise as much each year, therefore saving the government even more money in the long-term.  
  • Richard Exell, the TUC’s Senior Policy Officer has written a very interesting blog on the subject of using CPI to uprate benefits, and so has his colleague Nigel Stanley, the TUC’s Head of Campaigns and Communications.

 Disabled people

  • Disability Living Allowance will be reformed to introduce the use of medical assessments for all DLA claimants from April 2013.

Lone Parents  

  • Income Support for Lone parents will see an extension to the conditionality rules for those with children aged 5 and above from October 2011. This basically means that many lone parents will need to sign on as Jobseekers and look for full-time work once their youngest child is aged 5 and over.

 Expectant Mums

  • The £190 Health in Pregnancy Grant is to be abolished
  • The £500 Sure Start Maternity Grant will only be able to be claimed for your first child (or children where the first is a multiple birth) from April 2011.  

Housing 

  • Support for Mortgage Interest within certain means-tested benefits will be set at a level equal to the Bank of England’s published monthly Average Mortgage Rate from October 2010. 
  • From October 2011 the Local Housing Allowance will be set at the 30th percentile of local rents. 
  • Local Housing Allowance rates will be uprated in line with the CPI from April  2013. 
  • Deductions made on certain benefits for non-dependents living with you will be uprated in April 2011.  
  • Housing Benefit will be reduced to 90 per cent of the initial award after 12 months for claimants receiving Jobseekers Allowance from April 2013. 
  • From April 2011 Housing Benefit claimants with a disability and a non-resident carer will be entitled to funding for an extra bedroom. 
  • From April 2011, Local Housing Allowance rates will be capped at: 

-          £250 per week for a one bedroom property

-          £290 per week for a two bedroom property

-          £340 per week for a three bedroom property

-          £400 per week for four bedrooms or more

  • Funding for Discretionary Housing Payments, where Housing and Council Tax claimants can access additional help for rent and council tax not already covered by Housing & Council Tax Benefit will be increased by £10 million in April 2011 and then by £40 million in each year from 2012/2013.

 Saving Gateway

  • The Saving Gateway, a scheme to help low income families save will no longer be introduced in July 2010.

 Family Financial Health Check 

  • The Government has asked the Consumer Financial Education Body (CFEB) to develop a new annual family financial healthcheck. This will be introduced in spring 2011 as part of a national financial advice service.

IncomeMAX comment

It is certainly a bold budget and one that sets out a clear message on Tax Credits. The Government clearly wants the tax credits system to support only lower income families, rather than both lower and higher income families as has been the case.  

The Government clearly believe that Tax reform is the way forward, wanting to put money in peoples pockets before they start to pay tax, instead of paying tax and then claiming tax credits, which when you think about it does make more sense.   

Many of the usual client groups are targeted, and disabled people will rightly be worried that they could get caught up in the new medical assessments for DLA and, as previously announced, Incapacity Benefit and that they will lose benefits as a result.

Lone Parents have long been targeted and the change to Income Support rules for Lone Parents have been gradually coming in for a while now. In our experience the majority of Lone Parents have no real problems claiming Jobseekers Allowance and want to be in full-time work. But don't forget the difficulties that lone parents often face in finding work that is flexible with hours and also finding (and funding) suitable childcare. 

This budget, in my opinion, is a definite move towards making the majority of the public fend for themselves. 

The Government clearly wants us to be more responsible for our own lives and our own finances, whilst still having a benefits and tax credits system that supports people less able to support themselves. 

Many will welcome the proposed changes but what is evident is that the system, for the next few years at least, will remain complex and difficult to navigate. That is why good benefits advice will be as important as ever for those needing to access and make sense of the benefits and tax credits system.