Tax Credits Explained: All You Need To Know

The pressure is growing on David Cameron to review the cuts to tax credits, but what are they and is it really going to hurt hard-working people?

:: What are tax credits?

These are in-work benefits for the worst-paid in society.

Four-and-a-half million people claim tax credits with an average claim of £6,340 a year.

There are two kinds of tax credits – working tax credit and child tax credit.

The amount you can claim in tax credits reduces as you earn more but households earning up to £65,000 can claim if they have three or more children.

:: What has George Osborne done to them?

Cut them. Pretty hard.

He has halved the amount you can earn before your working tax credits start to reduce from £6,420 to £3,850.

And he has said families can only claim for two children – no more. Previously they could claim £2,780 per child. It starts to reduce as earnings hit £16,105.

(It did mean that some families earning up to £65,000 had entitlement.)

He has also increased the rate at which the credits reduce from 41% to 48%.

And he has reduced the flat £545 families used to get as child tax credit to zero.

:: Why would he do that?

Austerity medicine.

Because it will save the country £5.37bn a year by 2019 and he has a big hole to fill in the nation's finances.

He also promised to slash £12bn from the welfare budget and this goes a long way to doing that.

And tax credits were low-hanging fruit. They made up nearly 14% of welfare spending – just shy of £30bn.

That's way, way more than the £2.5bn the Government spends on Jobseekers’ Allowance.

:: Who will it affect?

In total all the welfare cuts introduced at the Budget, including tax credits, a freeze on working age benefits, no housing benefits for under 21s, and a benefits cap will cost 13 million people £260 a year.

Three million families are going to be more than £1,000 a year worse off, because of changes to tax credits alone says the Institute of Fiscal Studies (IFS).

It will affect anyone with a third child born after 6 April 2016.

Those who have more than two children born before April will not be affected – unless claiming for the first time or unless they stopped claiming tax credits for more than six months.

Oh and it's likely that those with triplets or who have twins after a first child will receive the full amount.

In the main it is going to affect poorly paid but hard-working people – those the Government says it is trying to help.

:: And what does the Government say about that?

Ah well the big giveaway in the Budget was the new National Living Wage which rises to £9 an hour by 2020.

David Cameron has been robustly defending the cuts, and refused to review it.

He says families will be £20 a week better off because of the raise and the cut in income tax.

The IFS says it is "arithmetically impossible" for families not to be hit by the cuts, and Mr Cameron concedes different families will be affected in different ways.

:: So will they reverse ferret on this one?

Well there is a lot of heat. There is pressure from within the party. Boris Johnson has sounded the warning bell over welfare reform.

And there is pressure from without. The Sun On Sunday has launched a campaign calling on Mr Osborne to change his mind.

And there's Labour leader Jeremy Corbyn and the anti-austerity protesters.

Given the letters to families about their imminent reduction in payments will be going out just before Christmas, expect pressure to build with talk of Chancellor Scrooge and ghosts of Christmas poor etc etc.

But Mr Cameron has been clear his Government will stand firm.

He has ruled out any review in the Autumn Statement and at the party conference has held the Chancellor’s line on this.

He says it is a fair way to bring the economy back into the black.