Tax Credits: Overhaul aims to simplify unpopular tax credits system

An overhaul of Gordon Brown's tax credits policy has been announced by the Treasury in an attempt to take the political heat out of the criticised scheme.

The Chancellor has championed the policy as a way of integrating benefits into the tax system as an incentive for making work pay. But with almost half of claimants receiving the wrong amount and payments beset by computer problems, it has been condemned for causing financial misery for tens of thousands of families as they face demands to repay cash. Labour MPs have warned ministers that the issue is causing the Government lasting damage with the voters.

Mr Brown said families claiming the credit will in future only have to tell the Treasury if their annual income changes by more than £25,000. The previous limit was £2,500. He said: "That will cover 95 per cent of all income rises during a year."

Dawn Primarolo, the Paymaster General, also announced further modifications to the tax credits scheme. From next November there will be a limit on the amount payments can be reduced to cover overpayments.

A third of all tax credit awards - more than 1.8 million - were overpaid in 2003-4, according to Parliamentary Ombudsman Ann Abraham. Ms Primarolo conceded that, without yesterday's changes, subsequent years' overpayments would be at roughly the same level.

She said: "The Government has looked to learn from the early operation of the system and will continue to do so."

From April 2007, when claimants report a fall in expected income during the year, their payments will be adjusted for the rest of the year to reflect their new income. The measures also give those claiming tax credits "responsibilities to report charges promptly and regularly".

Next summer, the deadline for providing information to finalise and renew awards will be brought forward by a month.

From next November, the range of changes reducing entitlement that need to be reported within three months will be expanded to include work status and number of children.

This period will, in turn, be reduced from three months to one from April 2007. In early 2007, the department will be contacting "key groups" of claimants for up-to-date income information.

From 2008-9, provisional payments will be paid on the basis of average earnings where no up-to-date information is available.

David Laws, the Liberal Democrat spokesman on work and pensions, said: "The numbers simply don't add up. Dawn Primarolo claims that overpayment problems will be cut by one third - but this would cost £800m per year, whereas the Treasury claims to be saving money."