TAX NEWS - June 2010

UK Tax: Child tax credits to be slashed for anyone earning over £25,000

Tax credits paid to middle-class families face the axe in next week's emergency Budget, Nick Clegg hinted yesterday.

In the Coalition Government's starkest warning yet on the issue, the Deputy Prime Minister described the current system, which entitles 90 per cent of families to tax credits, as 'madness'.

Labour introduced the complex scheme entitling families earning up to £60,000 a year to benefit handouts.

ut in a speech to the charity Barnardo's, Mr Clegg said the new Government was determined to 'reverse the trend of making families ever more dependent on the state'.

Both the Tories and Liberal Democrats went into the election pledging reductions in tax credits, but the Lib Dems wanted to go much further, cutting all payments to families with a combined income of more than £25,500.

Mr Clegg said: 'Under the old regime around nine out of ten families with children were eligible for child tax credits.

'To put that another way, the previous government thought that it was right for 90 per cent of all families with children to be dependent on means-tested benefits. That's madness.

'Instead we should be giving families their independence, giving them much more control over how they live their lives.

'That's why this government is going to raise the income tax personal allowance so that families can keep more of the money they earn.

'We have also said that we are going to scale back tax credits for higher earners. In light of the giant black hole in the public finances, there is simply no other choice.'

Tax credits are worth up to £2,300 per child. They were originally designed to help make low-paid jobs more attractive to families.

But they were gradually introduced further up the income scale, with even families earning more than £50,000 entitled to the £500 'family element' of the scheme. Last month's Coalition agreement said tax credits would be cut for higher earners, but gave no details on where the payment cut-offs would come.

The Tories entered the election saying they would scrap credits for families earning more than £50,000 a year and scale them back for those on incomes of more than £40,000.

The Lib Dems' policy would save £1.3billion a year, but about 2.3million families would be cut off.

Mr Clegg's comments yesterday suggest next week's Budget will unveil proposals closer to the Lib Dem stance, meaning that hundreds of thousands of middle income families will miss out.

Labour work and pensions spokesman Yvette Cooper said: 'Cutting child tax credit for families with a joint income of £30,000 or £40,000 a year will hit a lot of parents who already find themselves overstretched.

'Right now that help makes a particular difference to working mothers and in many cases is what helps them afford to work part-time or cover the extra childcare they need.'