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I've produced a paper on the income disregard and issues following from that. If anybody would like a copy of the PDF, drop me an email and I'll send it on. gmorgan@ferret.co.uk.
The following is an extract but might give an idea of some of the figures for a couple with 2 kids and no childcare costs.
"...Here it can be seen that the maximum difference can be as much as £6,922.70. Indeed, on gross salaries from £24,000 to over £30,000 this couple would receive the maximum Tax Credit of almost £7,000 in the first year and no Working Tax Credit at all the next year.
For example, if one of this couple was to start work after a long period of unemployment, education or illness and receive the median UK 2005 pay of £22,412; what would this mean to them?
The net pay after deductions of Income Tax and National Insurance, over a full year, would be approximately £16,870.
On current figures the Tax Credits entitlement would give a net income (excluding Child Benefit and any other items) of
First Year
Net Pay £16,870
Tax Credits £1,797
Total £18,667
Subsequent Years
Net Pay £16,870
Tax Credits £872
Total £17,742
Following the changes, the figures will be
First Year
Net Pay £16,870
Tax Credits £6,922
Total £23,792
Subsequent Years
Net Pay £16,870
Tax Credits £872
Total £17,742
The generosity of the Tax Credit payments in the first year produce a generous bonus on entering or returning to employment, or on receiving an increase in pay. Figure 3 shows that the total Tax Credits payable over the first 2 years, in these circumstances, is substantially higher under the new rules. Figure 3 also clearly demonstrates that the concession is worth considerably more to the better paid than to those on lower incomes.
The considerably higher overall income in the first year, over £5,000 higher or over 35% of longer term income, may, in the absence of proper advice and information, encourage the family to enter into commitments which will prove unaffordable in the second year onwards. Neither the customers nor the providers will wish to find out too late that such situations have arisen.
The impact on the general financial situation of the recipient should also be considered. Even where any commitment could still be met, or where none was entered into, the pattern of spending may well have been set and, without foreknowledge of the likely income in subsequent years, the situation may become extremely difficult. Budgeting, with awareness of income changes that will arise, is much more likely to be kept to...."
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