Will Tax Credit Reforms Hit Auto Enrolment?

1 October 2015

Will George Osborne's Tax Credit Reforms Hit Auto Enrolment? George Osbourne - image credit Reuters Although George Osborne's tax credit changes have been blocked by the House of Lords and he has promised to look again at the cuts to 'lessen their impact' on the UK's poor, is there a risk that they could have an impact on auto enrolment?

Tax credits were originally introduced by Labour's Gordon Brown, and were pioneering in helping the poor back into employment. Over time, the tax credit bill has risen substantially and since 2010 George Osborne has been hacking away at this amount and has so far saved £15bn per year.These cuts have largely gone unopposed but his latest proposals would almost certainly hit those families that are in genuine need, with the Institute of Fiscal Studies calculating that over 3 million families would be £1000 per year worse off.

On Monday, the House of Lords chose to reject the Conservative government's proposals, with 307 peers voting in favour of halting the cuts pending an independent review. This extremely unusual outcome was followed by Chancellor George Osborne, who had championed the cuts climbing down and admitting defeat, saying that he would begin looking at ways to accent the impact on the poorest in the UK. "I said I would listen and that's precisely what I intend to do," he said. However, he issued a stark warning to the House of Lords when he said that the vote in the House of Lords "raises constitutional issues that need to be dealt with."

What will the effect be?

George Osborne will come back to the House of Commons with revised changes to the tax credits system. These changes will certainly have a lesser impact on the poorest in the UK, but there will almost certainly still be a significant impact to many. That could see many working people with less money in their pockets which therefore could see an impact on one of George Osborne's other pet projects, auto enrolment.

Auto enrolment has been ongoing since 2012 and will see all eligible employees of businesses in the UK auto enrolled into an occupational pension scheme. So far, auto enrolment has been an undoubted success, with just 10% of employees deciding to opt-out of their pension scheme once enrolled. Auto enrolment was brought in by George Osborne to try and tackle the pensions crisis looming in the UK. With people not saving enough for retirement, auto enrolment was brought in as a way to kickstart people into saving for their later years.

However, will the Chancellor's revised tax credit reforms have a major impact on auto enrolment? There's no doubt that his initial reforms could well have done but we will just have to wait and see what he now comes up with. Anything that potentially takes money out of the pocket of working people could lead to more and more deciding to opt-out of their workplace pension to free money for day-to-day living expenses. Therefore cutting tax credits too harshly could in theory free-up government money in the short term, but in the long term it could add to the severity of a looming pensions crisis.

It will be interesting to see how the whole situation pans out.

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