Summer Budget 2015: Millions to face benefit cuts

Sweeping changes have been made to our benefits system as Chancellor George Osborne attempts to find the cuts he promised in his manifesto. Here, we breakdown the key changes. Also see our 10-minute Benefits Check-Up to ensure you're getting everything you're currently entitled to.

Working age benefits, including Tax Credits, to be frozen for four years

Legislation will be passed to freeze working age benefits, such as Tax Credits and local housing allowance. This will take effect from April 2016 and will remain for four years.

After taking into account inflation forecasts, the Institute for Fiscal Studies (IFS) estimates that this is the equivalent of a 4.8% cut to working age benefits over the four years. Put simply, this means that because costs of living are likely to increase over the next four years due to inflation, a freeze in benefits is equivalent to a cut (so your money won't go quite as far).

The IFS says this will result in 13 million families losing £260 a year on average in benefits.

Benefits included in the freeze are: Jobseekers' Allowance, Employment and Support Allowance, Income Support, Child Benefit, applicable amounts for Housing Benefit, and Local Housing Allowance rates (although provisions will be made for areas where rent is high).

The freeze will also apply to Child Tax Credit and Working Tax Credit excluding any disability elements. All disability elements are unaffected by the freeze.

Benefits excluded from the freeze are: Maternity Allowance, Statutory Sick Pay, Statutory Maternity Pay, Statutory Paternity Pay, Statutory Shared Parental Pay, and Statutory Adoption Pay, the Employment and Support Allowance Support Group component, any disability, carers or pensioners' elements of benefits and other disability, carer and pensioner benefits, including PIP and DLA, which will continue to be uprated in relation to prices or earnings as applicable.

See our Benefits Check-Up and Tax Credits guides for more on how the current system works.

Benefits cap falling

Chancellor George Osborne has today confirmed that the total amount of benefits a household (couples or single parents) with one child or more, or couples without children, can claim will fall from £26,000 a year to £23,000 a year for those living in London and to £20,000 for those outside the capital from April 2016.

For single adult households without children, the cap will be £15,410 a year for those living in London and £13,400 for those living outside the capital, down from £18,200 now.

'London' is defined as all 32 London boroughs that make up the Greater London area, plus the City of London. However, some benefits are excluded from this cap...

Benefits that count towards this cap are as follows: Housing Benefit, Jobseekers' Allowance, Income Support, Employment and Support Allowance (excluding the support group), Incapacity Benefit, Severe Disablement Allowance, Child Benefit, Child Tax Credit, Carer's Allowance, Guardian's Allowance, Bereavement Allowance, Maternity Allowance, Widowed Parent's Allowance.

If anyone in your household receives one of the following benefits then there is no cap whatsoever on total benefits claimable: Disability Living Allowance, Personal Independence Payment, Attendance Allowance, Industrial Injuries Benefits, the support component of the Employment and Support Allowance, War Widows and War Widowers pension and those entitled to Working Tax Credit.

See our Benefits Check-up to find out what you're currently entitled to.

Social housing to become more expensive for some

Two reforms have been announced. The first is that those who live in social housing and earn what the Government considers to be a 'higher income' – this includes families earning over £40,000 (pre-tax) in London or £30,000 (pre-tax) elsewhere – will have to pay rent at the market rate, making it more expensive.

The IFS says this is likely to affect about 10% of social tenants.

'London', as above, is defined as all 32 London boroughs that make up the Greater London area, plus the City of London.

The Treasury says the Government will consult on this reform and set out the detail in due course, including from when the changes will be implemented.

On the upside, if you're still eligible for subsidised rents, those paid in the social housing sector in England will be reduced by 1% a year for the next four years from 2016.

See our Renting guide for tips on cutting costs.

Summer Budget 2015: Benefits cap

Tax Credit and Universal Credit reductions, plus tougher qualifying criteria

From April 2016, the maximum amount of income a household can earn to be eligible for the full amount of Tax Credits will be reduced, from £6,420 to £3,850. This means if you earn more than £3,850 in a tax year, the amount you're eligible for will fall. Additionally, for every £1 you earn above this, you currently lose 41p of benefit. Under the reforms, you'll lose 48p of benefit.

For those entitled to Child Tax Credit only, the maximum amount of income a household can earn to be eligible for the full amount of Child Tax Credit will also fall from £16,105 to £12,125 from April 2016.

Families who have a third or subsequent child after April 2017 will also not receive Additional Tax Credit or Universal Credit support for this child. For more on how these benefits currently work.

In addition, those starting a family after April 2017 will no longer be eligible for the family element in Tax Credits, nor will new births or new claims be eligible for the first child premium in Universal Credit. See our Tax Credits guide for more on how the current system works.

Universal Credit work allowances will also be reduced – to £4,764 for those without housing costs, £2,304 for those with housing costs and will no longer be awarded to non-disabled claimants without children.

Support provided to families who make a new claim to Universal Credit after this date will also be limited to two children.

The following groups will be exempt from the changes to universal credit (UC): Those moving from tax credits to UC; those who come to UC after less than six months off benefits (tax credits or UC); or any new claims from those already on UC, automatically required by new household formation (e.g. a lone parent with three children who forms a couple with someone not currently entitled to UC).

Third or subsequent disabled children born after April 2017 will continue to receive the disabled child element and severely disabled child element in Child Tax Credits and the equivalent in UC, but not the child element.

Multiple births such as twins or triplets will be treated as a single birth.

Additionally, HM Revenue & Customs (HMRC) and the Department of Work & Pensions (DWP) have said they will work together to ensure that women who have a third child as the result of rape, or other exceptional circumstances related to an abusive relationship are protected.

Child Benefit will continue to be paid at the same level for all children.

The IFS says these cuts to Tax Credit and Universal Credit will affect just over three million families, who will lose an average of just over £1,000 per year.

Housing Benefit for 18 to 21-year-olds to be scrapped and the family premium removed for some

From 1 April 2017, 18 to 21-year-olds who are out of work and claiming Universal Credit will no longer be able to get housing benefit.

This does not include those who are in the equivalent of the Employment and Support Allowance support group.

It also doesn't include anyone who is in any of the following situations: Care leavers, couples where one is over 21 or falls into another exempt group, claimants responsible for a child, claimants living in temporary accommodation, claimants living in specified accommodation, which is any housing that provides care, support, or supervision (as these will continue to be funded by Housing Benefit), newly unemployed claimants who were continuously in work for the preceding six months (those who do not find work again within six months will no longer be exempt) and claimants already in receipt of housing benefit.

The DWP also intends to add an exemption for those that cannot live with their parents, for example, if they're estranged.

What about families? Families claiming Housing Benefit will also be hit, with the Government removing the family premium for children born or claims made after April 2016.

From April 2016, Housing Benefit claims will be backdated for a maximum of four weeks. Previously the backdate period was at your local council's discretion.

See our Benefits Check-up to see what you're currently entitled to.

Disability Benefits remain unaffected

The Government has pledged not to tax or means test disability benefits.

This includes Personal Independence Payment, Attendance Allowance, Disability Living Allowance and Employment and Support Allowance (Support Group).

Work-related Employment and Support Allowance to drop

From April 2017, claimants of this allowance who are placed in a work-related activity group – this could be anything from interviewing skills to work training – will now receive the same amount of money as those on Jobseekers' Allowance.

This is currently £57.90 per week for single people aged 24 and under, for single people aged 25 or over £73.10, for couples and civil partners (both aged 18 or over) £114.85.

In most cases this will be a drop in what they get compared to current rates.

Current claimants will not be affected. See our Benefits Check-up to find out what you're currently entitled to.

Support for mortgage interest now treated as a loan

Under the Support for Mortgage Interest (SMI) scheme, the Government makes interest payments on the first £200,000 of outstanding mortgages for those who can't afford it (see our guide for the full eligibility criteria). This is normally paid directly to the lender. But while it's currently a grant, from April 2018 it will be treated as a loan to all new and existing SMI claimants.

The Government says current claimants will receive guidance in advance on how this will work, and will need to decide if they wish to continue under the new loans system.

However, the Government has confirmed the loan will not be backdated, so any SMI that's been paid to claimants before April 2018 will remain a benefit, with no obligation to be paid back.

How will the loan work? A low level of interest will be charged on the loans – forecast to be 2.9% in 2018/19 – and will be updated every six months in line with a complicated Government forecast for the value of gilts.

The loans will be secured on the claimant's property as a 'second charge' (effectively a secured loan on top of the existing mortgage).

Technically, as this is a secured loan, the Government could repossess your home if you don't repay the loan. However, the Department for Work and Pensions says in reality the Government would never repossess your home under these circumstances.

Loan recipients will then be liable to pay back the loan the sooner of when they return to work, or when they sell their property.When someone gets a job a repayment plan will be agreed. If you refuse to repay the loan it'll be recovered from the sale of the property.

What happens if I can't afford to pay the loan back? In the case of those who receive SMI for a long time (e.g. into their retirement and up to their death), the amount of SMI paid plus interest, along with an administration charge, would be recouped from the equity in the property when it is sold.

Update: 6 August 2015: At the time of publishing we incorrectly wrote that if there is insufficient equity, the entire SMI loan balance will be written off, and the Government won't attempt to take any proportion of the debt. In actual fact, if there is insufficient equity, what is available will be used to pay off the loan. Any balance of the SMI loan still unpaid after this will then be written off.

See our Mortgage Arrears guide for more on how SMI works and for help if you're struggling to pay your mortgage.