The Coalition Budget 2010

Key welfare changes and their

impact on low income
households

July 2010

Myddelton House | 115-123 Pentonville Road | London | N1 9LZ | Tel: 020 7833 2181 | Fax: 020 7833 4371 | www.citizensadvice.org.uk : 7833 2181
Contents
ƒ Introduction
ƒ Gains and losses
ƒ Key tax credit and benefit changes
ƒ Key housing benefit changes
ƒ Child poverty
ƒ Work incentives
ƒ Appendix – scenarios illustrating impact on specific households

Introduction
The Chancellor called the Budget progressive, because his headline approach was to
combine a reduction in benefits for all or higher income families with an increase in the
child tax element of child tax for those on the lowest incomes. An examination of the detail
behind the headlines, however, presents a very different picture.

The most significant changes for low income families will be:
the move to up-rate benefits and tax credits by the consumer price index (CPI) instead of
inflation rates based on the retail prices index (RPI) - a reduction in government spending
of £5.8bn a year by 2014
cuts to the value of housing benefit for some – a reduction of £1.8bn a year
cuts to tax credits for low income families
the rise in the tax threshold will be of little benefit to low income families in rented
accommodation as the extra net income will result in reduced housing benefit.

Benefits for pensioners have been spared from cuts, with a net increase in spending on
the state retirement pension and pension credit amounting to £1bn a year.

This briefing aims to explain the tax credit and benefit changes announced in the
budget and how they will affect different low incomes households. The first section
provides an overview of all the key changes. As it can stand alone, there is some
repetition with the more detailed sections that follow. The next section analyses the
impact of each change. We then provide a summary of the combined impact of
these changes on child poverty and work incentives. The last section illustrates the
impact of these changes on households in six different situations.

Gains and losses announced in the budget, that will come

into effect by 2014
Gains
ƒ Rise in tax threshold by £1,000 from April 2011: anybody earning more than
£7,475 will gain £3.84/week in their take home pay or £200/year. However those
receiving housing benefit/council tax benefit will only see a net increase in
disposable income of 58p/week or £30/year. This is because for every extra £1 of
net income they will lose 85p in housing and council tax benefit entitlement.

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ƒ Increases in the child element of child tax credit of £150 a year or £2.88 a week
for each child from 2011 and a further £60 a year or £1.15 a week in 2012. The
child element is currently worth £2,300/year or £44.11/ week per child, for all
families whose income and circumstances mean that they are entitled to the
maximum amount. This would include all families on out of work benefits or
working 16 hours on the minimum wage.

ƒ From 2011-12 basic state pension to rise each year by the greatest of prices,
earnings or 2.5% (the ‘triple guarantee’).

ƒ Pension credit guarantee continues to rise with earnings, but will include an
additional cash increase in April 2011.

Key losses
ƒ Change in basis for up-rating benefits and tax credits to use the consumer
price index (CPI) from 2011-12 instead of the retail prices index and the Rossi
index. This is likely to mean a 1% real terms reduction in the value of benefits and
tax credits each year. This amounts to a reduction in spending of an estimated
£5.8bn a year in 2014.

ƒ In addition, from 2013, the Local Housing Allowance (LHA) - which is used to
decide the maximum housing benefit which can be paid - is also to be up-rated in
line with CPI not local rents. This means that the figure used to calculate housing
benefit will move further and further from a relationship to rent actually paid. The
cumulative effect of this will clearly have a very significant effect on all low
income groups.

ƒ Freezing of child benefit for 3 years from 2011-12. Child benefit is paid for every
child regardless of the income of the household. It is currently £20.30 for the first
child and £13.40 for the second and subsequent children. If CPI is 3% this will
mean a real terms reduction in the value of child benefit for one child of £1.77 and
for 2 children of £2.94, by 2014.

ƒ The rate at which tax credits are reduced as income rises, will rise from 39%
to 41% from 2011-12. This means that instead of losing £390 for every extra
£1,000 of gross income earned over £6,420, households will lose £410 of every
£1,000. Someone earning £16,420 will receive £200/year less in tax credits,
which will offset the gain from the increase in the tax threshold. Someone earning
£26,420 will receive £400/year less.

ƒ Reduction in Local Housing Allowance (LHA) rates from October 2011: The
LHA is currently set at the median of local private rents. This means that 50% of
local private rents are within the LHA rate. The change announced in the budget
will mean that only 30% of local private rents will fall within the LHA rate. For those
renting in the private sector - both in and out of work - this is likely to have a huge
impact. We calculate that the average loss in housing benefit for a two-
bedroom property, for a lone parent or couple with one child (or two young
children sharing a bedroom) - whether unemployed or on a low income - will
be £9.60/week, or about £500/year. In London, losses will be even more
severe.

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ƒ Loss of 10% of housing benefit after 12 months on JSA from 2013-14: tenants
who are unable to get a job - even through no fault of their own - will lose £15/week
on a rent of £150/week, amounting to £780/year. In London they would be likely
to lose £25/week or £1300/year.

ƒ £2,500 of any drop in income will be disregarded for tax credit purposes from
2012-13: households will not see their tax credit award adjusted until their taxable
income has fallen by more than £2,500, and only the value of any decrease above
£2,500 will be counted. This means that anyone whose income drops by £2,500 or
more, will receive £1,025 less in tax credits than they would before the change.
This is because awards fall or rise by 41 pence for every pound rise or fall of
income. £1,025 is 41% of £2,500. This may affect people who take maternity
leave, or long-term sick leave because they are diagnosed with a serious illness, or
if one of a couple is made redundant. The Treasury estimates that this tax credit
change will reduce spending by £0.59bn a year in 2014.

ƒ New child: a low income family with a new baby could lose up to £1,235 as a
result of the combined affect of the following changes: loss of £545 baby element
of child tax credit (from 2011-12); loss of £190 health in pregnancy grant (from
January 2011); and loss of £500 sure start maternity grant (SSMG) (this will be
no longer payable for second and subsequent children from 2011-12).

ƒ Reducing entitlement to the flat rate £10.50 a week family element of tax
credits. From 2011-12, families with incomes above £40,000 will see their
entitlement reduced. From 2012 there will be no flat rate of £10.50 a week, as it will
be reduced as income rises in the same way as the rest of tax credits. This will
affect families on much lower incomes and together these savings represent a
reduction in spending of £0.6bn a year from 2014.

Key tax credit and benefit changes

Change in up-rating of benefits and tax credits to the consumer price index
(CPI)
Currently most benefits are up-rated by the retail prices index (RPI) measure of inflation.
Means-tested benefits are up-rated by the Rossi index which is a variant on the RPI
excluding housing and items like local taxes on the basis that these are supported directly.
From 2012 pensioner benefits will rise in line with earnings. Recent research 1 by the
Joseph Rowntree Foundation (JRF) highlighted the huge impact that up-rating policies
have over time, both on relative living standards of different groups and on public finances.
They found that if current up-rating policies remain unchanged, pensioner poverty will
remain unchanged in twenty years, but child poverty will double.

The budget introduced consistency by moving to up-rate all non-pensioner benefits by the
CPI. But the CPI tends to rise at a lower rate than the RPI. This will mean that the real
terms value of benefits will continue to fall compared with average earnings, and will fall at

1
Sutherland H, Evans M, Hancock R, Hills J and Zantomio F, The impact of benefit and tax uprating on incomes and
poverty, JRF, April 2008

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least 1% faster than under previous up-rating rules. The budget estimates the change will
cut spending on benefits by £5.8bn a year by 2014. In May 2010 – the latest figures
available - at 3.4% the CPI was 1.7% lower than the RPI 2 . Estimates from the Institute of
Fiscal Studies (IFS) suggest the change is likely to be closer to a 2% cut each year 3 and
JRF Minimum Income Standard research shows that because of their household spending
pattern, people on low incomes face much higher inflation rates than the CPI, which
means they could fall behind even more 4 .

Child tax credit (CTC) increase of £150 above CPI in 2011-12 and £60 above
CPI in 2012-13 (extra expenditure in 2014 of £2bn)
This is an increase of £150 a year or £2.88 a week for each child from 2011 and a further
£60 a year or £1.15 a week in 2012. The child element is currently worth £2,300 per child
for all families whose income and circumstances mean that they are entitled to the
maximum amount. This would include all families on out of work benefits or working 16
hours on the minimum wage. This increase is very welcome, but if child poverty targets
are to be met, increases above CPI would need to continue beyond 2012 – particularly in
the context of other cuts.

Child benefit freeze and child tax credit (CTC) increase (a saving in 2014 of
around £0.98bn and a cost in 2014 of £2bn)
Although child benefit is paid to everyone, freezing it has a higher impact on low income
families as it makes up a higher proportion of their income. For families on the lowest
incomes and in receipt of maximum CTC, this loss will be more than offset by the increase
in child tax credit. This will not be the case however for families with a baby under one, as
they will no longer get the £545 baby element due to be cut in 2011 (see section below, on
families with babies). Wider changes to the tax credit system mean that it is more
complicated to assess whether working families with children will be better or worse off as
a result of the budget. The appendix provides illustrations of what the budget changes will
mean to families in different circumstances.

Withdrawal of child tax credit for higher income families

Almost two million families currently receive just the £10 a week family element of child tax
credit. When a household’s gross income reaches £50,000, this element is reduced.
From 2011 this family element will start to be reduced at a gross income of £40,000 rather
than £50,000. Around half a million families will cease to be entitled to tax credits. From
2012, there will no longer be any flat rate entitlement to the £10.50 family element.

For some families, £10.50 a week is a small percentage of their overall income, but for
families with household incomes of around £25,000 these changes will be more significant,
especially coupled with the freeze in child benefit.

Families with babies

Families with babies under one lose out significantly as a result of the changes
announced in the budget.
2
www.statistics.gov.uk/pdfdir/cpi0610.pdf
3
www.ifs.org.uk/budgets/budgetjune2010/brewer.pdf
4
www.jrf.org.uk/media-centre/MIS-2010

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ƒ Health in pregnancy grant (HiPG) – abolished from January 2011. In pregnancy all
mothers will lose the non-means tested, £190 HiPG;
ƒ Baby element of child tax credit – abolished from 2011-12. All families with babies
under one will lose the £545 baby element of child tax credit.
ƒ Sure start maternity grant of £500 - cut from all but first child from 2011-12. This
will be a loss for around two thirds of families currently entitled to child tax credits.
This loss will hit families differently depending on the age gap/s between their
children. While families may hold on to prams, car seats etc if there is only a two-
year gap between their children, those with a bigger gap may have to buy such
items again.

In addition, families experiencing a drop in income during a period of maternity leave will
see a much smaller rise in their tax credits from 2011. This is because £2,500 of any fall
in income will be ignored when calculating tax credit entitlement.

The increase in child tax credit is not enough to make up for the loss of the above benefits.
For example, a lone parent on income support, or a couple on Jobseeker’s Allowance,
who have a baby in 2012 would gain £210 a year in extra child tax credit but lose £1,235
as a result of the changes listed above. A lone parent who was working on a low income
and goes on maternity leave will lose £2,260 as a result of the changes.

Tax credit changes

Only 20 per cent of the £3.2bn savings from tax credit reforms expected for 2014 come
from reducing entitlement for families on higher incomes. More fundamental changes to
the system will have a direct impact on low income families. Reducing entitlement to the
family element of child tax credit reduces government spending by £725m a year by 2014.

Apart from the financial losses experienced by low income families as a result of these
changes, the changes are likely to cause extra confusion for claimants who have finally
begun to understand the complex rules.

Increasing the rate at which tax credits are reduced as income rises from
39% to 41%
Increasing the rate at which tax credit entitlement is reduced as incomes rise, means that
only those on the lowest incomes benefit from the announced increase in child tax credit.
It will, however, also cut entitlement to working tax credit for households without children.
The 2% rise in the rate at which entitlement is reduced as income rises, means that
families will lose £20 more than currently for every £1,000 of income above £6,420 or £410
instead of £390. So someone earning £16,420 will lose £200 a year in tax credits.
Someone earning £26,420 will lose £400 a year. This measure reduces government
expenditure by £0.64bn from 2011 and £0.765bn a year by 2014.

Reducing back-dating from three months (93 days) to one month

This will save the Government more than £0.3bn a year directly from low income families –
including those in poverty. Three months backdating currently gives families plenty of time
to be able to adjust to and report a change of circumstances. This is particularly important
for reporting the birth of a new child, since most families currently wait to apply until after

6
they have claimed and been awarded child benefit, enabling them to provide the requested
child benefit number on their application form.

Much more significant, however, is the loss of entitlement to three months backdating for
households who were not entitled to working tax credit because their income was too high.
A sudden drop in income results in their overall annual income falling sufficiently to mean
that they become entitled to tax credits for the whole of the tax year. They therefore
retrospectively have an entitlement back to April of that tax year. They can at present claim
backdating for 3 months, but following this measure, families will only have an entitlement
to one month backdating. Yet in these situations, immediate reporting of the change of
circumstances and income, does not prevent the loss from occurring. This might be where
one partner in a couple loses their job; or a single person becomes sick and claims
statutory sick pay. Following the change, they would still be entitled to working tax credit
and their income would be low enough to trigger an award. The scenarios in the appendix
below illustrate the significant loss for families in situations like this, when they are already
financially vulnerable.

Introducing a £2,500 income disregard for households facing a drop in

income
The tax credit system was designed to respond to changes in a family’s circumstances, to
help them manage a sudden fall in income for example, by re-assessing their award based
on their new lower income. This change announced in the budget means that families will
not see their tax credit award adjusted unless their taxable income falls by more than
£2,500, and only the value of any decrease above £2,500 will be counted. This means
that anyone whose income drops by £2,500 or more, will receive £1,025 less in tax
credits than they would before the change. This is because awards fall or rise by 41
pence for every pound rise or fall of income. £1,025 is 41% of £2,500. This may affect
people who take maternity leave, or long-term sick leave because they are diagnosed with
a serious illness, or if one of a couple is made redundant.

In 2009/10 440,000 families experienced an increased tax credit award - worth on average
£38 per week - as a result of a decrease in income 5 . The Government will reduce
spending by £0.59bn a year by 2014 at the expense of families who face a decline in their
financial position.

Reducing the rise in income that a family can experience before their
entitlement to tax credits is affected (this is called the income disregard)
The income disregard was increased from £2,500 to £25,000 in 2006/07 to reduce the
number of families overpaid each year as a result of increases in income. Overpayments
fell by about one third and now affect just over one million out of the six million families
who receive tax credits every year.

Reducing the income disregard to £5,000 by 2013/14 will continue to protect most families
from being overpaid as a result of pay rises, but will result in overpayments for families
where one partner returns to work mid-year, even if they report the change immediately.
The change will affect households where a family member returns to work after maternity
leave, sickness or unemployment. The confusion of the early years of the tax credits
system badly damaged people’s confidence. HMRC should review the impact of the
5
Budget March 2010

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change on overpayment levels. They must also ensure clear and consistent
communication about the changes, coupled with high quality administration, to prevent a
return to wide-spread overpayments and a further loss in confidence in the system.

Over-fifties returning to work

The 50-plus element is currently worth £1,965 a year for claimants over 50 returning to
work after six months unemployed or on sickness or incapacity benefits. From April 2011,
this will be abolished. The budget did announce that it would continue with plans to allow
older workers – aged sixty plus - to become entitled to working tax credit at 16 hours rather
than 30, but this will not give them extra tax credit entitlement.

Lone parents will have to look for work (and claim Jobseeker’s Allowance
(JSA) rather than income support) when their youngest child is aged five
instead of seven
From October 2010, all lone parents and partners of benefit claimants will have to look for
work when their youngest child reaches seven. The budget announced that from October
2011, parents will be expected to actively seek work and claim JSA when their youngest
child reaches age five. Jobcentre Plus must ensure that all initial Jobseeker interviews are
carried out by specialist lone parent advisers to ensure that action plans accurately reflect
the parent’s childcare needs. Changes to JSA regulations in 2009 allow a parent to limit
their job-search to work that fits around school hours. These restrictions on availability for
work may inevitably extend the time it takes to find an appropriate job. If they are unable
to find a suitable job within a year, they will now face a 10 per cent cut in their housing
benefit after 12 months on the benefit, which would very likely force them into financial
hardship, poverty and debt.

Key housing benefit (HB)changes (calculations apply to

England only)
There are six separate cuts announced to the HB scheme, amounting to a total reduction
in spending of £1.8 billion a year by 2014/5.

Local Housing Allowance (LHA) caps and restriction to 4 bedroom rate –

reducing expenditure by £65 million a year by 2014/15
This change will be introduced from April 2011, along with the removal of the £15 weekly
excess provision (where rent is lower that the LHA rate). The weekly LHA rates will be
capped at:

ƒ £250 for a 1 bedroom property,

ƒ £290 for a 2 bedroom property
ƒ £340 for a 3 bedroom property
ƒ £400 for a 4 bedroom property

The impact of these caps will be felt across Greater London but nowhere else. Within
London, only Newham, Redbridge, Havering and Barking and Dagenham will be
completely unaffected. The 4 bedroom LHA rate for central London (Westminster and
parts of Camden and Kensington and Chelsea) is currently £1,000, so some claimants will

8
see a £600 per week fall in their housing benefit when it is reviewed after April 2011. It
appears that larger families will be disproportionately affected – both by the restriction to
the 4 bedroom rate and by the £400 cap on that rate. As black and minority ethnic families
are over- represented amongst larger households, this must have implications for DWP’s
equality impact assessment (yet to be published).

LHA to be set at the 30th percentile – reducing expenditure by £0.435 million

a year by 2014
The LHA is currently set at the median of local private rents. This means that 50% of local
private rents are within the LHA rate. From October 2011 only 30% of local private rents
will fall within the LHA rate. These new rates will be used to assess claimants’
entitlements on the annual review of their LHA.

This will affect tenants across the country. The Valuation Office Agency has published
indicative figures for England, based on current LHA rates for each Broad Rental Market
Area (BRMA) and for each bedroom size. We calculate that average LHA rates in
England will fall by £5.64 a week for the one room/shared room rate, £7.73 for a one
bedroom property, £9.60 for a two bedroom property, £13.33 for a 3 bedroom property and
£24.26 for a 4 bedroom property. Again, it is clear that the pain will not be equally spread
across the country, with LHA reductions for a one bedroom property ranging from zero in
Southport, Scunthorpe, Bedford, Northants Central and Rotherham, to £25.50 in the Inner
North London BRMA, and for a 4 bedroom property from £4.37 in Ashford to more than
£50 in SW Herts, East Cheshire, the Chilterns and much of London. In some parts of
London, the 30th percentile figure will be irrelevant as the caps outlined above will depress
rates below this level.

The lack of transitional protection means that these caps will be applied to the existing
claims on their next annual review, meaning that some tenants will suddenly find that their
rent is completely unaffordable.

Index linking of LHA – reducing expenditure by £390 million. (Needs primary

legislation)
From 2013/14 LHA rates will be up-rated in line with the CPI. Currently they are adjusted
monthly to reflect actual rents in the area.

This change will have two effects: firstly, it will erode LHA rates over time as rents
generally rise faster than CPI, and, secondly, by using a national index, it will break the link
with the movement of local rents. So two areas which have similar rent levels when the
change is made in 2013, but which subsequently diverge as a consequence of differences
in local economic factors, will find their LHA rates stay in step while actual rents vary.
Again there will be (relative) gainers and losers.

Non-dependant deductions (NDDs) to increase, reversing previous freezes –

reducing expenditure by £340 million
If a tenant has a non-dependant living with them who is 18 or over (typically an adult son
or daughter or elderly relative), a fixed amount is deducted from the tenant’s housing
benefit, because it is assumed that the non-dependant makes a contribution towards the
rent. There are six separate rates of NDDs depending on the earnings level of the non-

9
dependant. These rates, which have been frozen since 2001, range from £7.40 to £47.75
a week. From April 2011 there will be staged increases in NDDs to bring them up to the
level they would have been had they been fully up-rated since 2001.

We estimate that the top rate will rise from £47.75 to at least £69. NDDs are highly
unpopular – they are complex to administer and for claimants to understand, and they are
perceived as unfair since they are imposed at the same rate regardless of the rent due.
There has long been pressure for reform (if not abolition), but the compromise was to
freeze the rates to reduce their impact. Non payment by the non-dependant is common,
meaning that they are a frequent cause of rent arrears, as well as family tension and
pressure on non-dependants to move out of the family home.

Social sector - Limiting working age HB entitlement to reflect household size

– reducing expenditure by £490 million. Needs primary legislation
From 2013/14, working age claimants in the social sector will be treated in the same way
as private tenants, with their HB entitlement restricted to the rent for an appropriately sized
property.

This should help address under-occupancy in the social rented sector, which is welcome,
given the huge demand for social housing. It will be important that social landlords
respond by prioritising transfers for under-occupying tenants. However the same
pressures may mean that it is impossible for the under-occupying tenant to get a transfer
to a property of the right size. If they move to the private rented sector they will, of course,
face the LHA cuts outlined above. This cut has been branded as ending security of tenure
by the backdoor, as it may make it impossible for tenants to sustain their tenancy. Rent
arrears are likely to rise. The size of the anticipated saving suggests that it is expected to
affect large numbers of households.

HB award reduced to 90 per cent after 12 months for claimants of JSA –

saving £110 million
From 2013/14 any claimant on JSA for more than 12 months will have their HB entitlement
cut by 10 per cent. This will continue until they have “left the benefit system and been in
work for a while”.

This seems a crude measure as it appears that it will apply even where the tenant is fully
complying with their JSA requirements to actively seek work. The cut will fall hardest on
those who face disadvantage in the labour market, such as people in poor health or with a
disability who have failed the harsher medical tests for incapacity benefit and employment
and support allowance, and have therefore been moved onto JSA. It will also affect lone
parents who will have to claim JSA once their youngest child is five. They can restrict their
jobseeking to fit with school hours but the availability of these jobs may mean that they are
more likely to stay on JSA for a longer period.

Discretionary housing payment (DHP) budget to rise from £20 million to £30
million in 2011 and to £60 million from 2012
The cuts will undoubtedly place huge additional demands on local authorities’ DHP
budgets. While we welcome the extra money, the amount is tiny in comparison with the
£1.8 billion cuts.

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Child poverty
The Treasury asserts that by increasing the child element of child tax credit above
indexation, alongside the freezing of child benefit for three years, the budget will cause no
measurable impact on child poverty in the next two years. However, the Treasury
calculations are based on modelling these two changes only. In conjunction with other
cuts – including housing benefit and benefits paid specifically to families with babies –
there is a real risk of an increase in child poverty as a result of this budget.

Families with children under four face the highest risk of living in poverty, yet it is these
families that have been worst affected by the budget. Labour’s last budget introduced £4 a
week extra in child tax credit for children aged one and two, on top of a system already
providing an extra £10 a week for families with a baby under one. This budget has cut all
these extra age-related payments even for families on the lowest incomes – those on out
of work benefits or in part-time and low paid work. The scenarios in the appendix highlight
the impact of the combined effect of all the changes.

Work incentives
The budget increased the targeting of resources on low income families by freezing
payments made to all children – child benefit – and increasing means-tested child tax
credit paid to the poorest. Increasing the targeting of money is done through increased
means testing, which reduces work incentives, as it means families lose their benefit
income for every extra pound of income they earn. Measures announced in Labour’s last
budget of March 2010 increased by 40,000 the number of households losing more than 90
pence for every extra £1 earned. Treasury figures predict that the Coalition Government’s
first budget will increase this number by a further 20,000.

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Appendix – scenarios illustrating impact on specified households 6
The following scenarios show how people in particular situations will be affected by the
changes announced by the budget. All of the scenarios highlight how families in
particularly vulnerable positions will lose income as a result of the budget.
1. A man in his fifties who has to leave work due to sudden illness: already facing a
considerable drop in income, he will be worse off as a result of changes in the
budget
2. A couple in their fifties: the man works full time and his partner part-time. He had
to give up work two months into the tax year because of the return of cancer that
had been in remission for 5 years.
3. A lone parent with two children aged five and seven: living in privately-rented
accommodation, she is on benefits and keen to find work that fits around the
children.
4. A 50 year old man with mild learning disabilities and literacy issues: he has done
manual work all his life until his arthritis made it impossible to continue with his job.
5. A couple with one child aged three: the father works full-time and earns
£15,000/year, and they pay rent in the private sector.
6. A couple with one child, both working, with a joint income of £25,000 until she
leaves work for a year to have another baby.

1a. A single man of 55 years earning £13,500 per year. He lives with his widowed
mother in the house which she owns. His net income is £215.59/week, out of which he
pays a number of the household bills. In September he becomes ill and is diagnosed with
cancer and is told he will need to be off work for at least six months, maybe longer. During
this time he will be entitled to statutory sick pay (SSP), which counts as working for the
purposes of working tax credit (WTC) entitlement.

Before the budget

When he becomes ill his income will drop to £113 (SSP plus WTC) a week. He will
receive £442 in backdated WTC as his entitlement can be backdated for three months.

Post budget he will gain from the raising of the tax threshold and will lose from the
following tax credit changes:
The 2% rise in the rate at which tax credits are reduced as income rises – from 39% to
41%
Ignoring falls in income of up to £2,500 when assessing tax credit entitlement
Reducing backdating of tax credit awards from three months to one month
up-rating all benefits and tax credits in line with CPI not RPI

As a result of all the above changes he will have a weekly income of £95. This is a drop
in income of £18/week, or 16 per cent, as a direct result of announced changes. He
will only receive one month’s backdating of working tax credit - £49 instead of the
£442 he would receive now (in 2010).

6
Scenarios include the effect of one year’s uprating plus all other changes announced in the budget
regardless of which year they are due to be implemented in. The effect of the uprating will be cumulative so
that by April 2014 when all the changes are introduced the drop in real terms will be much greater than
shown. The changes in National Insurance have not been included.

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1b. A single man of 55 years earning £13,500 per year. He pays rent of £110/week
and council tax of £20. He will be entitled to some housing benefit. He will have a total
disposable income of about £112/week after paying his housing costs.

Before the budget

He has a stroke and is told he will need to be off work for at least six months, maybe
longer. During this time he will be entitled to statutory sick pay (SSP), which counts as
working for the purposes of working tax credit entitlement. His disposable income after
housing costs will drop to £91.50 a week (SSP, WTC and HB/CTB). He will also receive
£442 back-dating of WTC as his entitlement can be backdated for three months..

Post budget he will gain from the raising of the tax threshold and will lose from the
following tax credit and housing benefit changes:
• The 2% rise in the rate at which tax credits are reduced as income rises – from 39%
to 41%
• Ignoring falls in income of up to £2,500 when assessing tax credit entitlement
• Reducing backdating of tax credit awards from three months to one month
• up-rating all benefits and tax credits in line with CPI not RPI
• cuts to LHA rates in housing benefits

Overall, the measures in the budget considerably reduce the help for people like him from
tax credits. His disposable income after housing costs will reduce to £88 before changes
to HB are taken into account. However the drop to the 30th percentile for calculating LHA
rates is likely to lead to a further drop of about £7.50 on average for a 1 bedroom property,
leaving him with a disposable income after housing costs of £80.50. Compared to
£91.50 at present for someone in this position, this represents a drop of £11, or 12 per
cent. He will also only receive one month’s backdating of WTC - £49 - instead of the
£442 he would receive now (2010).

This is a huge impact for someone on a very low income and already in the difficult
position of absorbing a drop in income because of illness

2. A couple both in their fifties, with a combined income of £25,000. He works

full-time and earns £20,000, she works 12 hours /week and earns £5,000/year. They have
paid off their mortgage and therefore own their own house. They pay council tax of £25 a
week. Five years ago he was diagnosed with cancer, was treated and nine months later
was able to return to work. However they faced a huge drop in income at that point and
most of their savings were spent getting through that period. He becomes ill again 2
months into the tax year and is told that the cancer has returned.

Their disposable income (after council tax) had been £372/week before he became
ill. They received no benefits or tax credits. Their combined incom0e this year from
earnings and sickness benefits will be £12,200. While he is on SSP they will have a total
disposable income, including tax credits, of £202 a week. Again this a huge drop of
income for them to adjust to, and the £406 back-dated WTC is very helpful.

Post budget they will gain from the change in the tax threshold and will lose because of
the changes in up-rating and the other changes in tax credits (2% rise in withdrawal rate to
41%, and the new disregard of £2,500 for falls in income). They will only be eligible for
£86 in backdating instead of £406 and their total weekly income in real terms after housing
costs will be about £185. This is a drop of £17 compared to the situation they would

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be in now (in 2010). This group are already in an extremely difficult position, and a
drop of income of £17 a week – some 8.5 per cent – puts them at risk of significant
poverty.

Someone who became ill earlier in the tax year would not gain at all from the
increase in the tax threshold and would lose even more from their WTC so would be
worse off by several pounds more.

3. A lone parent on income support, with 2 children living in private rented

property and paying £130 a week rent. At present she has a disposable income after
housing costs of £198 (made up of JSA and CTC). She will gain about £2 after two years
as a result of all the budget changes to benefits/tax credits, apart from housing benefit.
However, her housing benefit may well drop by £10 a week as a result of using the 30th
percentile to calculate the LHA (the average drop in LHA for a 2 bedroom property is
£9.60, while in London it is about £37) so overall she is likely to be £8 a week worse off.

She will have to claim JSA instead of income support. If after a year on JSA she fails to
find a job that fits with school hours and her skills, she will have a 10% cut in her HB - a
further drop of £12/week. This is a much higher financial sanction than her Jobcentre Plus
personal adviser could impose and she has not broken any rules, since regulations allow
her to look for work that suits her childcare responsibilities. Overall she finds her income
drops by £20/week as a result of budget changes, representing a 10% reduction in
disposable income.

4. A 50 year old man with mild learning disabilities and literacy issues has done
manual work all his life until arthritis in his knees, hips and shoulder forced him to
stop work. He has worked and paid contributions all his life until that point. He pays rent
of £110/week and council tax of £18/week.

He claimed ESA but was found fit for work, so is now claiming JSA. The number of jobs
he will be able to do is severely limited. He also has no access to his own transport and
finds public transport very difficult because of the arthritis. His Jobcentre Plus personal
adviser finds it difficult to suggest jobs for him. He has been out of work since his arthritis
made it impossible to continue in his job two years ago and he has been claiming JSA for
a year.

After housing costs he has a disposable income of £65.45 a week (his JSA). After a year
as a result of changes in up-rating of JSA and also the LHA rates, his disposable income is
likely to drop in real terms to about £64. However he may well also lose a further £8 off
his HB as the 30th percentile rate is used to calculate the LHA rate. If he is unable to find a
job after a year he will lose a further £10 a week of his HB. If he can not find somewhere
cheaper to live he will have a disposable income after housing costs of about £46, a
30% reduction. Even if he can find somewhere cheaper to live, his disposable income
will drop to £54, a 17.5% reduction.

If he had been allocated to the work-related activity group for ESA, his income would be
£91.30 a week.

5. A couple with one child aged 3. He works full-time and earns £15,000/yr.
They pay rent in the private sector of £140 a week and Council tax of £28 a week.
They have a disposable income after housing costs of £241 a week.

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 After all the changes are taken into account, he will gain from the raising of the tax
threshold and the rise in the child element of child tax credit; they will lose from the
following changes:

The 2% rise in the rate at which tax credits are reduced as income rises – from 39% to 41%
Up-rating benefits and tax credits in line with CPI not RPI
Cuts to LHA rates in housing benefits

His net income from work will increase by £3.84 but their benefits in real terms will
decrease by about £6.70 making them about £3 a week worse off.

However they are likely to lose about £9 a week from their housing benefit, making them in
total about £12 a week worse off– a drop of 5 per cent in disposable income.

6. A couple with 1 child aged 2, and a mortgage. He earns £20,000 a year

working 40 hours a week, and she earns £5,000pa, working 16 hours a week. They have
childcare costs of £80 a week. They have a mortgage of £135 a week and council tax of
£25 a week.

They have another child and the mother takes a year’s maternity leave. Their disposable
income will be £580 including tax credits of £160 a week. After housing and childcare costs
of £240 are paid, they will have a disposable income of £340 until her maternity
allowance ends when their disposable income will drop to about £262 a week.

In addition they would currently receive SSMG of £500 and health in pregnancy grant
of £190.

Post budget they will gain from the raising of the tax threshold and the rise in the child
element of child tax credit, and they will lose from the following changes:
ƒ The 2% rise in the rate at which tax credits are reduced as income rises – from
39% to 41%
ƒ Up-rating of benefits and tax credits in line with CPI not RPI
ƒ Ignoring falls in income of up to £2,500 when assessing tax credit entitlement
ƒ loss of baby element of child tax credit
ƒ loss of Sure start maternity grant
ƒ loss of health in pregnancy grant

They will not receive the grants totalling £690. Their tax credits will drop by £41 to £119 a
week, but will gain £3.84 from the raising of the tax threshold, so they will now have a
disposable income of £303 a week - a drop of £37 or 11 per cent.

When her maternity allowance ends, they receive an increase in council tax benefit (CTB)
which slightly offsets the loss, but overall, their income will drop - to about £228 a drop of
about £34 or 13 per cent compared with the current pre-budget situation.

Citizens Advice is an operating name of The National Association of Citizens

Advice Bureaux. Registered charity number 27905
www.citizensadvice.org.uk

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