Update 25 November 2015

The Chancellor has announced during his combined Autumn Statement and Spending Review that the changes to the tax credit income thresholds and taper rate, announced just four months ago and due to take effect from April 2016, would not now be introduced.

This u-turn follows a House of Lords vote in October which meant he would otherwise have had to delay implementing the changes and consider transitional protection for those affected. This will certainly come as a great relief to the millions of low income working households who stood to lose on average a thousand pounds per year.

The proposed tax credit changes (now cancelled)

At the moment households receive the maximum amount of tax credits for their circumstances until they reach an ‘income threshold’ of £6,420. Every £1 of income over this threshold reduces your maximum tax credit award by 41 pence.

From April 2016, this income threshold was going to be reduced to £3,850 meaning that every £1 of income over £3850 would reduce your maximum tax credit award.

At the same time the ‘taper rate’ was going to be increased from 41% to 48%. This would mean that you would lose 48 pence of your maximum tax credit award for every £1 you earned over the income threshold instead of 41 pence.

The effect would have been that any working household receiving tax credits with an annual income of more than £3,850 a year would be worse off.

Still going ahead

The change to the income rise disregard is still going ahead. Currently if your income rises by up to £5,000 during the tax year it doesn't affect your tax credit award for that year. From April 2016, this income rise disregard will be reduced to £2,500. This is expected to affect 800,000 people, with those affected losing around £200-300 per year. It also increases the risk of overpayments if income does rise by more than £2500 and this is not reported until the end of the tax year.