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Tax credit cuts will hit lower income families

Tax cuts for low and middle income families in April will be dwarfed by hidden reductions in tax credits, according to a new study that found the £1bn of tax cuts in April will be outweighed by reductions of more than £2.5bn in the complex tax-credit scheme.

Most of the cuts to credits, which top up the wages of low-income families in work, will take effect from April and could catch families unaware.

The Government's flagship policy of raising income tax thresholds has been trumpeted by the Liberal Democrats as their main achievement since the coalition was formed last year, but the Resolution Foundation think tank, which undertook the study, questions the fairness of the changes.

George Osborne, the Chancellor, increased the personal tax allowance from £6,475 last year to £7,475 in the current financial year, and it will rise to £8,105 in April.

But new plans mean basic rate taxpayers will only gain by a "very small" £41 per year after the April rise in tax thresholds.

The foundation said the biggest winners will be those with middle to high incomes: "Overall, the measure remains regressive in the lower half of the distribution... not only is the change huge overall; it is not widely understood or known about - being made up of a number of small changes to both the child tax credit and working tax credits."

The foundation's study concluded that low to middle income households receive 56% of all tax credits in cash terms, and so will be hit disproportionately.

Changes will also mean a couple with two children and an income of £40,000 a year will see it fall by 8.9% this year and next year, and by 14.5% by 2013-14.

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