Tax credits explained: What are they, and what might happen to them?

David Cameron has vowed to make £12bn in cuts Credit: REUTERS/Oli Scarff

While David Cameron hasn't yet said where he will find £12bn of welfare cuts that have been promised, many experts are predicting that the brunt of the cuts will fall on tax credits. But what are they, and what would the effect on society be if it happened?

ITV News political editor Tom Bradby reports:

What are tax credits? Introduced by Tony Blair's government, tax credits are designed to help low-paid workers with their tax burden. There are two different types: the child tax credit and the working tax credit.

What is the child tax credit?Up to a certain level of income, the government will pay families some cash for each child they have up to the age of 16, or up to 20 if they are in education.

What is the working tax credit?People over 25 earning less than £13,100, or couples earning less than £18,000 can claim a working tax credit, provided they work at least 30 hours a week.

The exact amount depends on circumstances, but it can be several thousand pounds. People under 25 with children or a disability can also claim this credit.

Why might tax credits be on the chopping block? Chancellor George Osborne has ring-fenced any cuts to pensions and universal pensioners' benefits, which are worth £93 billion a year, or about 45% of the total spend of £205 billion.

Meanwhile, experts say cuts outlined in the Conservative manifesto, like freezing working-age benefits and reducing household caps to £23,000 a year, will only save £1.5 billion.

Therefore, the other £10.5 billion cuts must be found in the rest of the welfare bill. Tax credits, worth £30 billion a year, are the biggest single benefit left.

The government says the welfare bill is considerably stretched as it is, and parts like jobseekers' allowance and child benefit would have to take far sharper cuts, proportionally.