Credit where it's due

More money for people with children and more money for people in low paid work. That’s the promise of the Government’s new tax credits which begin in April. Despite their name the new tax credits can be paid to people who do not pay tax. Thousands of Saga readers may benefit from them.

Child Tax Credit is for people in or out of work who have a dependent child, who may also get help with childcare costs. Most widows and state pensioners who have a dependent child will get more money from April.

Working Tax Credit is new money for people in low paid work or self-employed people on low incomes even if they do not have children. There will be extra for those aged 50 or more. Many people on the minimum wage or just above will get their pay boosted by the Government.

So if you are in low paid work or self-employment or you have dependent children under 19, you may be entitled to a new tax credit from April.

The new Child Tax Credit starts on 6 April and most people with a dependent child will be able to claim it. Child Tax Credit will replace the extra amounts for children paid with retirement pension and other state benefits, though people who get minimum income guarantee or income support will have to wait until October or next April for the changeover and people already getting extra for children will keep it. It also replaces the Children’s Tax Credit and unlike that it can be paid to non-taxpayers and it can be paid for a child aged 16-18 who is in education or looking for work. It comes in two parts

· A family element of £545 a year (£10.45 a week) tax-free, however many children you have, if your income is below £50,000 a year. The family element is paid at double the rate for the tax year in which a new baby is born.

plus

· A child element of £1445 a year (£27.75 a week) tax-free for each child, if your income is below £13,230 a year.

At the moment people on retirement pension or bereavement allowance get £11.35 a week for the first child and £9.55 for each other child added to their retirement or widow’s pension. So tax credits mean that many pensioners and widows who have a dependent child will get a lot more money than they do now.

People who already get extra for a child with their retirement pension will keep it – it will just count as income when they claim CTC. But people who claim retirement pension or widow’s benefit for the first time after 6 April will not get any extra with their pension for a child – they will just get the CTC.

If your income exceeds £13,230 the annual amount of the child element is reduced by 37p for each £1 above that level. It disappears for one child when your income reaches £17,137 and for two children at £21,044. The family element however continues to be paid at those incomes and it does not begin to taper off until your income reaches £50,000 a year. Then it is reduced by 6.67p for each £1 above that amount. No family element is paid if your income is more than £57,786 a year. More details in Table 1. There can also be extra child credit to help with the costs of childcare for a child up to 15 which can, for example, help parents with two children on an income of up to £42,500 a year. Child Tax Credit is quite separate from child benefit. From April that is £16.05 for the first child and £10.75 for each other child and is paid on top of Child Tax Credit.

Working Tax Credit is paid to people in low-paid work – or have low-paid self-employment – and for the first time it can be paid to people without children. It replaces working families’ tax credit and disabled person’s tax credit. To get it you must normally be aged 25 or more and work for at least 30 hours a week. But people who are disabled or who have children can be as young as 16 and only have to work for 16 hours a week. People aged 50 or more who have just returned to work can get extra Working Tax Credit for a year and need only work for 16 hours a week or more.

After a year that will fall to £10 a week – but the Working Tax Credit is a useful boost to her pay, especially in that first year. Disabled people get a higher rate of Working Tax Credit. If Anna was disabled her Working Tax Credit would be £79 a week for the first year and £49 a week after that.

WTC can be paid at any age – so even if you are 70 and do some work, you may be able to claim it. However, at that age your state retirement pension – and any other income – will be added to your wages before the calculation is done and may well mean you do not qualify.

Working Tax Credit is higher for couples and lone parents and for people who are more severely disabled. Table 2 shows the maximum rates of Working Tax Credit for various categories of people. To get the maximum WTC your income needs to be £5060 a year or less. The minimum amount of WTC is 50p a week and the table also shows the maximum income you can have and still get some WTC.

The calculation of tax credits is based on your income – joint income for a couple who are married or live as husband and wife. Income includes all pensions as well as the actual income earned by savings. It is not reduced by the amount of any savings or capital. Income is counted ‘gross’ before tax or other deductions. The tax credit is calculated on the income in a previous tax year. Once awarded, the amount will not normally change for a year. If your income goes down you can tell the Inland Revenue and the credit may be increased. But if your income goes up there is no need to tell the Inland Revenue unless it rises by more than £2500. You must also inform the Revenue if your personal circumstances change – like how many children you have or who you live with.

Tax credits are claimed from the Inland Revenue which is slowly taking over many of the functions of the old Department of Social Security (see box). Child Tax Credit is paid into a bank account every week or four weeks. Working Tax Credit is normally paid through the pay packet. Both start on 6 April.

The rules about tax credits are complicated. The application form is 12 pages long and the notes are another 48 pages. But please do not let that put you off claiming. There is real money being given back to low paid people and families with children – and some of it is targeted at people over 50. So make a claim – it will not cost you anything and it could well mean more money.

If you have access to the internet you can see what you will get from Working Tax Credit and Child Tax Credit by going to the Inland Revenue website and filling in an on-line form. You can make your claim on-line too at www.inlandrevenue.gov.uk/taxcredits. Alternatively you can phone 0845 300 3900 (0845 603 2000 in N.I.).or call into a local Inland Revenue Enquiry Office.

Tax credit arithmetic is very strange. The annual amounts are generally the ones set by law. The Inland Revenue reckons there are 366/7 weeks – not 52 – in the leap tax year 2003/04. So weekly amounts are approximate and all figures have been rounded.

February 2003

e-mail Paul Lewis on paul@paullewis.co.uk