Tax Credits – what next?

What will George Osborne come up with in his Autumn Statement and are tax credits an essential element of the UK tax system?

Tax Credits do, in fact, have very little to do with taxation as recipients do not in fact need to be paying tax to receive them. They are an increasingly important part of the benefit system aimed at low income working families. In the 2015/16 tax year it is estimated that they will cost the taxpayer around £30bn or 14% of the total welfare budget.

There is strong evidence that the policy has been effective, with the number of children living in families below the poverty line falling from 35% of the child population to 19% since the introduction of tax credits at the end of the 1990's. 

So after the rebuff from the House of Lords, what will the chancellor now do? There is a possibility that he will change the way that tax credits are introduced by ensuring that any new restrictions only apply to new claimants, but this will result in a shortfall in closing the deficit gap.

We can also be fairly certain that he won't want to increase borrowing or raise any of the income tax rates, but it is possible that the chancellor may now look to use the tax system to fund the gap.

Some of the options he may be exploring could include:   

• lowering the starting point of income tax rates;
• aligning NICs and income tax which could mean an extra £300 a year in the pocket of someone at the lower end of the pay scale, potentially paving the way for the inevitable changes to tax credits at a slightly later date; 
• delaying the increase to personal allowances;
• increases to CGT;
• delaying the IHT enhancement to main residence or increasing the IHT rate;
• delaying the reduction in the corporation tax;
• Increasing the focus on tax avoidance and evasion. 

It’s likely that if there are any tax increases, then they’ll be introduced on 25th November when the chancellor will give his first all Tory Autumn Statement. Watch this space.