Treasury Select Committee Inquiry into Budget Measures and Low Income Households
Summary and key points
We welcome the Chancellor’s announcement to raise personal allowances by £600, and respect the decision to compensate the majority of those affected by the abolition of the 10p rate, ‘fairly, quickly and efficiently’. We believe that providing compensation through the tax system rather than through a more complicated package that would include changes to the tax credit system is the right decision.
In common with many of the MPs in the House yesterday, we would like to know the profile of the 1.1million people who will still lose up to £120/year, and are keen to hear the Chancellor’s proposals to ease their financial problems in the longer term.
We believe that means tested benefits and tax credits can be a good way to channel extra money to people with specific needs. We remain very concerned, however, about the rates of take-up of working tax credit for households without children, and the quality of delivery. We therefore recommend that the government reviews and addresses these problems urgently, in order to provide effective long-term support for those on the lowest incomes.
Introduction
1. Citizens Advice Bureaux provide advice on almost three and a half million welfare benefit, tax credit and debt problems every year and therefore have an interest in the impact of budget changes on low income households. CAB clients are spread across all age groups and represent household couple and single households, with and without children. We therefore have a voice on how the changes impact on households across the age and family spectrum.
2. Through the introduction of tax credits, and increases in child benefit and with increasing number of families in employment the Government has made significant strides towards child poverty target. Six hundred thousand children have been have been lifted out of poverty since 19971. Disappointingly, the Government failed to meet the target of reducing child poverty by a quarter by 2004/05 and numbers in poverty actually rose by 200,000 in 2005/06. To halve child poverty by 2010 efforts need to be stepped up considerably. We await the delayed 2006/07 figures with some concern.
3. There has also been a consistent fall in relative poverty amongst pensioners since 1997. The 2008 budget also saw a pension credit rise of 4.2 per cent, which gave a welcome boost to the incomes of the poorest pensioners. However, take-up is very low. Estimates of the benefit unclaimed by people aged 60 and over are at least £2.4bn and potentially as much as £4.2bn per year. We have welcomed the Government’s intention to increase the state pension in line with earnings, and urge them to set a firm date for its implementation soon, to prevent the relative value of the pension falling further.
4. The incidence of poverty amongst working age adults without dependent children has risen significantly in recent years. The risk of poverty for this group is still lower than for pensioners and households with children but it is at the highest level since records began as they have not benefited from tax and benefit reforms introduced since 1997. Adult rates of benefits have remained untouched by Labour’s reforms. Updated in line with the Rossi index, Jobseeker’s Allowance and income support annual increases have not even kept pace with the annual increases in the poverty line2. Though incapacity benefit claimants fare a little better - their benefit being uprated in line with RPI - they have still not kept up with rises in wages and therefore continue to fall behind other groups.
5. With the need to push ahead much faster on reaching the child poverty target, the last couple of years – and the 2008 budget in particular - has seen further support targeted at households with children and pensioners.
The effects of the abolition of the 10p starting rate of income tax - groups who lose financially from the overall budget package
6. It is estimated that overall the poorest third of the population are the biggest winners3 from the recent budget packages - which is arguably a significant achievement. It was intended that tax rises for those in work would be more than offset against changes to working tax credit, and loss of the 10p tax rate would be offset for pensioners by an increase in personal allowances. The problem is that many poor households without children and many pensioners – an estimated 5.3 million - lost out as a result of the withdrawal of the 10p tax rate but do not gain from other measures in the budget. Most of the 5.3 million affected will now be recompensed by the Chancellor’s recent decision, but there are still 1.1 million on the lowest incomes. Some of them will be among the following groups, and should be carefully considered in decisions made in the autumn. These are:
- Workers under 25 who, though meeting the hours rules, are not entitled to claim working tax credit
- Migrant workers who meet the age and hours rules but are not entitled to claim working tax credit because their immigration status gives them no right to public funds.
- Part time workers - those who work fewer than 30 hours a week
- Couples whose joint income is above £17,500, which pushes them beyond entitlement to WTC, or whose award will not be enough to compensate them for tax rises on both incomes
- Some single individuals (over 25) who, though paying more tax as a result of the change, are currently earning too much to be entitled to WTC.
- Pensioners aged between 60 and 64, who are too young to benefit from the parallel rise in the personal allowance for over 65s.
The impact of low income on these groups
7. Costs of living are rising and more and more people are coming to Citizens Advice Bureaux with problems paying basic bills. Living on a low income whether it be on benefits, or in low paid work and reliant on low wages and tax credits, can mean a very fine balancing act. It doesn’t take much to go wrong before a family can find themselves facing real hardship or falling behind with payments and slipping into debt.
8. New debt figures show that Citizens Advice Bureaux in England and Wales saw mortgage arrears enquiries shoot up by 35% in the first two months of 2008 compared with the same period in 2007. In 2006/07 we received 60,000 new enquiries specifically about fuel debts – an increase of 33 percent on the previous year. Initial figures for the first half of 2007-8 show that this general upward trend has continued, with bureaux dealing with almost 35,000 new enquiries about fuel debt. We also saw continuing rises in problems with telephone and council tax debts. The cases below illustrate the problems:
A woman in her fifties sought help when she found herself having failed to keep up with her debt repayments and unable to buy basic essentials including food. She had just lost the extra 50+ element in her working tax credit as it lasted just a year on returning to work. She had also noticed the effect of the 10p tax rate in her pay packet. For the past two weeks she had been surviving on just the free meal provided for her at work.
A disabled man in his fifties sought advice from a Leicestershire CAB because he was extremely worried about paying his electricity bill. His electricity supplier had increased prices by 34 percent in the last year, meaning that the client was now unable to afford regular electricity payments and was faced with the prospect of getting into debt or self-disconnecting from his electricity supply.
Young people
9. Young people aged under 25 face discrimination in the benefits system. Whilst claimants aged 25 and over are assumed to need £60.50 per week to cover day to day living costs such as food, fuel and clothing, under 25s are entitled to only £47.95. Workers under 22 are paid a lower ‘development rate’ of minimum wage. This discrimination is compounded for single under 25s renting in the private sector, by restricting their housing benefit (HB) to the average local rent for shared accommodation - known as the single room rent (SRR). Recent figures show that as a result 87 per cent of this group faced a shortfall between what they receive in HB and what they pay in rent, averaging £35.14 per week4 . This is over double the shortfall faced by other claimants. This shortfall has to be met from their lower rate of benefit or lower wages. Their exclusion from working tax credit entitlement already compounds their disadvantage and the abolition of the 10p tax rate has made this worse. We welcome the Chancellor’s decision to increase personal allowances as this will directly help this group.
A 21 year old woman living on her own in social housing was struggling to manage financially. She had two childcare jobs which paid her minimum wage, and worked a total of 31 hours a week. She was paying full rent and council tax - though the bureau established that she would be entitled to around £1 a week in housing benefit. If she had been 25 she would have been entitled to an extra £45.08 a week working tax credit which would have made a substantial difference to her £148.43 income.
Part time workers
10. Many part time workers provide a supplement to the main household income, but for many households part time earnings are the only source of income. Part time workers without dependent children are very likely to be in the group earning around £7-8,000 and will have found themselves paying more tax but will not have benefited from other changes announced in the 2007 and 2008 budgets and pre-budget reports. Carers for adult dependents are in a particularly difficult position as their caring responsibilities mean that they are unable to improve their financial position by seeking full time work.
A couple sought help with their finances from their bureau. The wife had been unable to work since being diagnosed with bowel cancer last year. She had finished treatment & been given the all-clear, but had been left with severe hand, feet and joint pain. She also had problems with her balance had to use a stick to walk. She was unable to dress herself or cook and needed the help of her husband. He had been receiving Carer’s Allowance but had returned to work 20 hours a week. They were little better off financially because he earned too much to get carer’s allowance, but didn’t work enough hours to get working tax credit. The bureau stressed the disparity between those who have caring responsibilities for children and those with caring responsibilities for disabled people.
Another bureau identified the complex financial situation faced by one widow caring for her autistic adult son. The bureau helped her to consider how she might improve her financial position. She worked for 12 hours and at £5.50 an hour earned slightly above the minimum wage. She received carer’s allowance and her son got DLA. The only way she could increase her income was to work 30 hours a week. Though she wouldlose her carer’s allowance, she would get working tax credit as well as higher earnings. Her caring responsibilities prevented her from increasing her hours so significantly but as her son was now an adult she could not claim working tax credit on the basis of her need to care for him. The bureau’s benefit check did find that she was not claiming council tax benefit and was entitled to around £14 a week.
Pensioners
11. Some 420,000 individuals have recently been identified as having to repay a tax debt, as HMRC failed to collect tax on small pensions. We continue to press for these debts to be written off by HMRC. We understand the need for these pensioners to pay tax in the future – although the Government might take the opportunity now to simplify tax liabilities for pensioners, enabling them to have more money without having to ‘claim’ a handout. The current plan to collect past liabilities back to April 2007 is not only impracticable, but completely at odds with the Government's wider agenda of tackling pensioner poverty. The requirement for this group to pay such a tax liability could immediately undermine the sense of reassurance engendered by the announcement of the rise in personal allowance.
12. The complexity of means-tested benefits for low income pensioners leave many struggling as they fail to claim their full entitlement. Only half of eligible older people claim council tax benefit and as many as two in five could be missing out on pension credit, totaling up to £2.5bn a year.
13. Between 2005-07, funding from the DWP’s Partnership Fund helped twenty-three Citizens Advice Bureaux in England and Wales generate thousands of pounds in extra income for vulnerable older people, who might otherwise never have realised that additional help was available to them, let alone claimed it:
- Over twelve months, Middlesborough CAB saw 724 clients, resulting in 519 new benefit claims and estimated £834,681 in new benefits awarded to older people.
- Salisbury CAB carried out more than 250 visits to vulnerable elderly clients in their own homes, and raised over £400,000 in previously unclaimed income in the first year. Results for the second year were expected to exceed £600,000.
- Berwick CAB was able to help clients make 77 applications for pension credit, 176 for housing and council tax benefit, 127 for attendance allowance and 60 for carer’s allowance. 189 benefit checks were carried out in the first year, raising £425,000 for local vulnerable elderly clients in the first year.
14. The case below highlights how one pensioner in fact gained from being told about the loss of the 10p tax rate. Already struggling financially and using her savings to pay her basic bills, she sought advice and a benefit check discovered she was not claiming all her entitlement.
A 70 year old pensioner visited her bureau because she had received a letter from her occupational pension to say that since the Budget she may have to pay more tax. As she was over 70 she should have not lost out from the tax changes. However following a quick benefit check it transpired that she was due approx £13 a week council tax benefit and £7 pension credit.
The broader context
Take-up
15. Whatever package of remedies is considered in the autumn, it is absolutely essential, in our view, that they are accompanied by:
- Significant measures to dramatically increase take-up of means tested benefits and tax credits by families in low paid work, and to improve the standards of service provided by the HMRC and DWP.
16. Success in supporting low income families through tax credits and other means tested benefits (such as housing benefit and council tax benefit) depends on high take-up. The latest figures show that fewer than one in four households entitled to working tax credit, but with no dependent children, actually claim it (22% take-up rate). Take-up of housing benefit and council tax benefit by those in work is also low - only around 50 per cent claimed housing benefit in 2005/06. At the same time almost 900,000 households – predominantly on low incomes - were underpaid tax credits last year. If the government is serious about compensating the remaining 1.1 million who have lost out – as well as addressing child poverty - it must ensure that a higher proportion of those eligible actually receive the help they are entitled to.
Improving quality of benefit and tax credit delivery
- Steps to simplify the welfare benefit and tax credit systems, join up the services provided by HMRC and the DWP and improve the standard of all these services.
17. The introduction of tax credits administered by HMRC means that families on benefit and households moving in and out of low paid work have to deal with at least three different Government departments (Jobcentre Plus for out of work benefits, HMRC for child tax credit and working tax credit and the local authority for housing benefit). Reporting changes to each department places a heavy burden on claimants and all too often results in gaps in payment as there are three agencies who fail to interact well together or to provide fast and accurate processing of the change.
18. A pilot project to trial joint working between these agencies to smooth the transition for people who frequently move in and out of work has been a welcome step towards resolving these issues but there is a long way to go. We would press for the need for joint working between HMRC and local authorities to include people in work but with changeable hours.
19. CAB regularly report poor quality administration of benefits and tax credits. Our 2007 report Not Getting Through highlighted hardship faced by Jobcentre Plus claimants as a result of delays in processing benefit5. Bureaux increasingly report advising claimants who are reluctant to claim tax credits because of previous bad experience, leading them to fear overpayments and financial uncertainty in the future. A survey of tax credit claimants in 2007 found that almost half were less likely or definitely did not want to claim in the future.
A single woman in her thirties sought help from her bureau with a tax credit overpayment. She was on a training course and receiving income based Job Seekers Allowance. She had an overpayment of working tax credit of over £1,000 from when she had been working and had been paying back £16 a month for more than two years. She was crying throughout the interview. She wanted to return to work but was scared to claim tax credits because of her previous overpayment and the hardship the repayments caused. The bureau advised her what her entitlement would be on her return to work and how this level would drop after the first year. She insisted that she would open a savings account and not spend the tax credit payments, as she was so worried she would have to pay them back later.
20. Further improvements in the administration of benefits and tax credits are essential in ensuring families are able to take up opportunities to move into work and to change their working hours without risking the financial stability of their families.
21. In particular HMRC must work to improve the quality and depth of advice and information given to WTC claimants whose hours fluctuate, to minimise overpayments as well as improve take-up.
A lone parent was contracted to work flexible hours that ranged between 20 and 40 a week. She had been getting working and child tax credit but since her youngest child left school she lost her child tax credit and fell out of entitlement to working tax credit when her hours fell below 30. She had already repaid an overpayment of around £150 but came to the bureau having just been told she had been overpaid a further £1,000. She was concerned by how complicated the tax credit calculations were and worried about getting further overpayments. Having no control over working hours she decided she wanted to opt out of the tax credit system.
22. Increasing the earnings disregards in the benefits system could help compensate those who work less that 16 hours and would more broadly increase work incentives for those who, due to disability or caring responsibilities, cannot work many hours. If the Government is serious about empowering people to work, it needs to look very closely at the current structure of earnings disregards, benefit tapers and savings and capital limits.
23. The Work and Pensions Committee in its report into simplification of the benefit system recommended that the Government set up a Commission to look at simplification of the system. We endorse this proposal and would expect such a Commission to report to the Treasury and look at the interaction of the benefits, tax credits and tax systems both in terms of minimising complexity and in ensuring that work pays.
24. This Commission should also look at the whole realm of income disregards, tapers, and income thresholds and earnings limits. The mismatch between different thresholds can cause unnecessarily complexity and confusion to people. Earlier this month a CAB adviser in Wiltshire pointed out the anomaly for her client and many like her whose pension was above the personal allowance and therefore taxed even though it was deemed too low to live on, and she was therefore entitled to additional help from pension credit.
Excluded groups
25. Since the introduction of tax credits we have pressed for carers unable to work full time to be brought into eligibility for working tax credit (WTC). This measure is long overdue and we urge that regardless of broader compensation measures, introduced in the Autumn, the Government should:
- Allow carers to qualify for WTC at 16 hours. Families with children and disabled people qualify at 16 hours; extending this eligibility to carers would recognise that the caring responsibilities of this group limit their ability to work full time.
1. Ending Child Poverty: everybody’s business, April 2008
2. IFS, Poverty and Inequality in the UK, 2007
3. IFS, 21 April 2008
4. Single room rent: the case for the abolition, Citizens Advice, December 2006
5. Not getting through: CAB evidence on the new system for claiming benefits from Jobcentre Plus, July 2007
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