Overview

In October 1999, tax credits were first paid to parents who worked but had low family incomes. On 5th April 2025, the last tax credit payments were made, bringing to an end a policy that had a major impact on the UK social security system and on efforts to combat child poverty. While tax credits have spent a long time dying – gradually being replaced by Universal Credit (UC) over more than a decade – their final demise marks a moment when it is worth reflecting on what we learned from the tax credit era. The present government’s commitment to review and improve UC makes these experiences all the more salient in 2025, as does its commitment to develop a strategy to bring child poverty down, backed by a task force, reporting this year.

While the initial Working Families Tax Credit was paid only to working families with children, the remit of tax credits expanded in 2003 to include both payments to working people without children and the child element of out-of-work benefits. Tax credits had commonalities both with their predecessor, Family Credit, and with their successor, UC. But they should be remembered as an ambitious expansion of support for people on low incomes, that sought to underpin a more comprehensive anti-poverty strategy. In many ways UC is their natural successor, although political and economic change have to some extent exaggerated their differences.

There is a tendency to remember certain negative aspects of tax credits - including administrative anomalies, high and rising costs and selected negative impacts on work incentives. Yet they also enjoyed some fairly spectacular successes, notably the central contribution to by far the biggest fall in child poverty on record, and to a dramatic turnaround in lone parent employment rates. Some of their initial deficiencies were largely remedied.

This paper starts by giving an abbreviated history of tax credits, notes some of their key achievements and then discusses some of the challenges that they faced – in common with UC. A central message is that an anti-poverty mechanism covering people in and out of work is not at all easy to design well, and will always face an underlying dilemma of balancing adequacy for the poorest, reasonable incentives to work and constraints on public spending. The paper ends with a modest proposal for reforming UC entitlements, but this is not the only possible way forward. The important thing for future governments is to be clear about priorities, accepting that not all objectives can be fully achieved, but above all ensuring that claimants feel supported by the system, rather than having to battle against it.