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Page last updated at 13:22 GMT, Tuesday, 4 May 2010 14:22 UK

Tax credits: Are family budgets under threat?

Hugh Pym
By Hugh Pym
Chief economics correspondent, BBC News

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Throughout the election campaign the BBC's expert team of journalists is examining the key claims made by politicians and assessing what their policies and promises mean to you.

Welcome to Reality Check. Today I'm asking whether Labour is right to claim Conservative and Liberal Democrat policies threaten family budgets.

In the latter stages of the election campaign it has become one of the most contentious issues.

Labour has accused the Conservatives and Liberal Democrats of planning changes to tax credits which would hit ordinary middle-income families.

Yvette Cooper, work and pensions secretary, has said the opposition parties want "to roll back the support for working families… to make it harder for families to manage, making it harder for many mums to afford to work part time".

Yvette Cooper says the Tory and Lib Dem plans would affect 'average families'

The Tories and Lib Dems have hit back, denying they would hit the poorest in society and pointing to other policies which would help working people.

So are family budgets under threat if Labour's opponents win power?

As is often the case, the answer is not clear cut. It depends what sort of families we are talking about and what range of policies should be considered to offset the effect of child tax credit changes.

Lump sum

The child tax credits system was introduced by Labour as part of the drive to combat child poverty and to help families. It is payable regardless of whether the recipient is working or unemployed.

The election debate focuses on the "family element" which is a lump sum of £545. This is available to couples earning joint incomes of up to £50,000 per year.

Income above which a family would receive nothing:
Labour: £58,175
Conservatives: £48,175
Lib Dems: £31,400 (family with two children)

For those earning more than £50,000 the amount they receive reduces by £1 for every £15 increase in income. Under the current system any households with a joint income over £58,175 will receive nothing.

In contrast, the Conservatives plan to drop the current £50,000 threshold to £40,000. This would mean tax credits would be reduced by £1 for every £15 of a couple's income above £40,000. According to the Institute for Fiscal Studies (IFS), this would mean couples earning more than £48,175 would receive nothing.

The Lib Dem plans are a little more complicated. The family element would be withdrawn once a couple cease to be eligible for another entitlement, the "child element" - which is at an income of £25,500 for a family with one non-disabled child aged one or above or £31,400 for a family with two children.

Graph showing tax credit change impact

The IFS estimates that 1.2 million families eligible for child tax credit are in the band of income from £40,000 to £58,000 which would lose out under the Conservative plans. Some 2.3 million families would be child tax credit losers under the Lib Dem policy.

But it is worth noting that only 71% of those entitled to the family element actually claim it.

The IFS also points out that the family element of child tax credit has actually been cut by 19% in real terms since its introduction in 2003. This is because its value of £545 a year and upper threshold of £50,000 have not been increased in line with inflation. Had it done so, it would now be worth £670 and be paid to families with annual incomes up to £61,500.

Still, looking just at child tax credit, it remains the case that millions of families would lose out under the Conservative and Lib Dem plans.

The IFS, however, stresses that these do not include the "poorest in society" under recognised definitions of poverty. The institute argues that the "better off" half of all families would be the losers.

Average family?

Let's look at a couple earning about £24,000 each - with a total income of just above £48,000 as an example. Under both the Conservative and Lib Dem proposals, they would no longer be entitled to claim child tax credits.

Although the couple's earnings are around average in the economy and they might seem like "middle income", looking at the spread of all family incomes they would actually be above the median.

Stuart Adam from the IFS says poorer families would not be hit

But although that couple on just above £48,000 would lose out under Conservative and Lib Dem child tax credit plans, if you take into account other policies, the same couple would gain in other ways.

The Conservatives, if they took office, would reverse Labour's planned National Insurance rises for many workers. So our couple, assuming they both earn about the same amount, would be £300 better off than under Labour. That partially offsets the £545 lost from child tax credits.


The Lib Dems would raise the tax free income tax threshold to £10,000. Our example couple would gain £1,400 under this policy - more than compensating for the tax credit losses.

So back to the question - the narrow answer is that some middle income families will lose out on tax credits. But you can't ignore the effects of other policies.

And then there's the wider reality. Dealing with the deficit will demand far bigger savings than have been set out by any of the parties. And that's pretty much certain to hit many families hard.

A selection of your comments are below.

I do feel that £30,000 a year after tax is an adequate income and an extra £500 pounds is neither necessary or fair. I would be, as a student mother of three, grateful to receive that sort of money in paid employment, as I have been managing on far less per year. I believe the Conservatives and Lib Dem's are right to cut the threshold.
Chantel, London

As with most of the policies of most of the parties, as a child free couple we are part of the ignored section of society. In my opinion, if you can't afford to have children, the state should not be stepping in with handouts. The money would be better spent on education to encourage people out of poverty through hard work and careers, not state subsidies which encourage not working.
Neil, Guildford

I wish we were an average family earning £48,000!
Dave, Isle of Lewis

I'm a single parent who works full time [and] can't claim anything else ie school dinners etc. How would I afford to send my children to nursery/childminder if [they] cut child tax credit? It's like the saying the rich get richer and the poor get poorer. Let's all look after the people with money.
Marie, Nottingham

The amount of money paid in "family tax" credits is ludicrous. Last year the total payment was over £24 billion, this is in addition to the £11 billion paid in child benefit. The whole system is over complex, shambolic and wide open to fraud. Payment should be capped at 2 children - why should the taxpayer subsidize large families? It, like the whole tax & benefits system, needs to be completely overhauled.
Gus, Ayr

Tax Credits are just a needless complication to the already complex taxation rules in this country. I say scrap the lot, no income tax no NI, no duty on petrol or booze etc and just set VAT to say 50% on everything. That way the more you spend the more you pay in tax, fair to all.
Colin, Mildenhall

As a parent of a two-year-old, I previously thought that having children was a lifestyle choice between my wife and I. Should I receive extra tax credits above child allowance? No, I don't think so. I thought that before I had children, since those that chose not to have kids already pay proportionately more through Council Tax for schools, etc. Even though I qualify for this money, I don't and wont claim it, and am amazed anyone could do so having seen the forms that have to be completed. If you want kids fine, but just don't expect everyone else to pay for them.
Ian, Basildon

These tax credits are part of a huge step forward the UK has made in recent years towards eradicating child poverty. For the Conservatives and the Liberals to suggest this is where savings could be made is unbelievable and makes clear the areas they would pursue further cuts.
David, Paisley

My wife has had to leave her full time job to stay at home and bring up our 2 children. We have to survive on my wage alone as it costs us more for childcare than she was getting going to work. We get no help other than tax credits and Child Benefit. If anything, working parents should get more help... not less. My wife is desperate to get back to work... but we can't afford it!!
Stuart, Burton on Trent

As a family, we survive on a nurses wage (a pittance) and use the tax credits we get to top it up. We earn 'too much' to qualify for working tax credit. I chose to stay at home to look after our children instead of work ( I am a university graduate) and the money we get from the government helps us to do this. I agree that the system is difficult to understand and flawed and therefore needs an overhaul. Perhaps we could fund it by cutting the allowances of the MPs?
Selina, Cardiff

Tax credits disincentivise work and trap families on welfare with almost no possibility of escape, ever. Between £10 and 30k, every additional £1 you earn attracts 20p income tax, 11p national insurance and 39p withdrawal of tax credits. 20 + 11 + 39 = 70% tax. Forget the £5.80 minimum wage. What you actually take home is £1.74. Would you work for that? No.
Harry, Bristol

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