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Tax changes for 2011–12: Tax credits

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The child element of child tax credit (CTC) will rise by £255 to £2,555 per year.

From April 2011, people moving from employment and support allowance into work will automatically qualify for the disability element of working tax credit (WTC).

The government will review the ‘disadvantage test’ used in the WTC rules. The coalition government has announced a package of reforms to reduce the cost of tax credits:

· From April 2011, the threshold at which the family element of child tax credit starts to be tapered away will be reduced to £40,000 (previously £50,000). From April 2012, the threshold will be abolished and this element will start to be tapered away immediately after the child element.

· From April 2011, both rates at which tax credits are withdrawn will be increased to 41 per cent (formerly 39 per cent and, in the case of the family element, 6.67 per cent)

· From April 2011, the new baby addition to the family element will be abolished. From April 2012, the 50+ element will be abolished.

· Those elements that are increased each year in line with inflation will, from April 2011, be increased in line with the Consumer price Index (CPI) rather than the Retail Prices Index (RPI). The CPI excludes housing costs and has tended in the past to increase at a lower rate than the RPI.

· However, the child element of tax credits was increased by £150 more than inflation in April 2011 and will rise by £60 more in April 2012.

· From April 2012, new claims can be backdated only one month (currently three).

· Tax credit claims are initially based on last year’s income and revised once this year’s actual income is known. In the past, any increase in income compared with last year up to £25,000 was ignored. This disregard will be reduced to £10,000 from April 2011 and £5,000 from April 2012.

· If this year’s actual income is lower than last year’s, currently tax credits are adjusted upwards to make good the underpayment. From April 2012, any fall in income up to £2,500 will be disregarded and not trigger an increase.

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