Is the tax credits and benefits system just too complicated?

Millions of people in the UK claim child tax credit, working tax credit and other benefits. But, over the last few decades, has the benefits system simply become too complicated and too large?

The Government certainly think so, and there are plans in place to overhaul the tax credits system through the ‘Universal Credit’ planned for 2013. Here, we look at whether the existing tax credit system is too complicated and what the new changes might mean for you.

Complex benefit and tax credits system means billions go unclaimed

Figures from the Department for Work and Pensions (DWP) show that billions of pounds worth of benefits go unclaimed each year. The BBC reports that up to £2.8 billion in pension credit, used to top-up pensioners’ weekly income, is not taken up, while over £3 billion in housing benefit was not being claimed.

Charity Age UK has called on the government to make people more aware of what they are entitled to, calling the loss to pensioners ‘staggering’.

The most recent figures, which refer to 2009-10, show that:

So, with the current system so complicated that billions of pounds in tax credits and benefits are going unclaimed, the Government has decided to change the system. We look at these changes next.

Government plan to simplify the system

Mike Dixon, assistant chief executive of the Citizens Advice Bureau, believes that the complexity of the benefits and tax credits system makes people reluctant to claim. He says: “It’s really hard to understand at the moment. People moving into work have to move from one benefit to another, which makes them nervous.”

And, the current tax credits system may not be working. Tax credits are designed to help people off benefits by making work pay. However, analysis by the Institute for Fiscal Studies (IFS) shows that those who are most dependent on benefits – the poorest families – face a steep withdrawal of benefit when they move into work. It found that 1.5 million people are on an effective tax rate of 70 per cent to 100 per cent when they began working.

In 2013, the government will launch the biggest reform of benefits since the modern welfare state was introduced in the 1940s. It includes the introduction of the ‘universal credit’, which will merge six benefits – child tax credit, housing benefit, jobseeker’s allowance, income support, working tax credit and employment support allowance – into one monthly payment.

James Browne of the Institute for Fiscal Studies said: “The current system is more complicated than it needs to be and the government has decided to simplify it by integrating most means-tested benefits for working-age people. However, the rules for calculating universal credit will still be complicated.”

And, not everyone will benefit from the universal credit. The IFS calculates that 2.5 million families will gain, 1.4 million will lose out and 2.5 million will see no change. The main people who will gain are those people for whom going into work is least economically attractive.

Keep heading back to over the next few months for all the latest news on universal credit and how it will affect you.

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