Estimated number of claimants affected by the Tax Credit (Income Thresholds and Determination of Rates) (Amendment) Regulations 2016
Published 28 January 2016
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In providing information to the Secondary Legislation Scrutiny Committee, in relation to the Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2016, HMT has released the estimated number of people that will be affected by the new Income Rise Disregard in Tax Credits, of £2,500, compared to a situation where the disregard had remained at £5,000. A tax credit award will only be adjusted in response to a claimant earning more money. Next year there are expected to be 800,000 claimants with a reduced award as a result of their income increasing – none will be cash losers because their income will have increased.
An overview of the model used to calculate this figure is below.
1. Overview of tax credit forecast methodology
The tax credits expenditure forecast model is a micro-simulation, i.e. a simulation of individual families’ circumstances. It is based on the latest 2013-14 administrative data on finalised awards – a random sample of 500,000 recipients drawn from the same source as the tax credit National Statistics. The model is essentially static with families’ circumstances held constant over the forecast period, although adjustments are made for a number of economic and demographic factors such as earnings and population growth. Entitlement is projected in to the future on the basis of these determinants.
In this way, adjustments are made year-on-year to account for the changing tax credits population, and the annual award is re-calculated in each year on the basis of new rates and thresholds. To estimate the number of families who see a reduced award as a consequence of the lower income rise disregard, the model estimates 2016-17 tax credit awards firstly on the basis of a disregard of £5,000 and then assuming a disregard of £2,500. The numbers of families with reduced awards as a result of the lower disregard is calculated by comparing entitlements in the two scenarios.