This piece first appeared in The Daily Telegraph on 17 February  2001
The text here may not be identical to the published text

Credit where credit isn't due

The new children's tax allowance is complex, confusing and full of anomalies

Government adverts started this week to encourage parents to ‘be prepared’ to claim the new Children's Tax Credit. But they belie the complexities and anomalies that lie at its heart. Research by Your Money reveals that the Credit will be given to some men who are not fathers and do not support a child. It will also be given in full to some couples where the joint income is more than £65,000 a year – but withheld from others where income is around half that. And married men aged 66 or more with a dependent child will face a difficult choice between Children's Tax Credit and married couple's allowance if their income is more than about £18,000 a year.

In principle Children's Tax Credit is a simple benefit – it is worth £442 a year and goes to a parent with a child under 16 living at home. Only one credit is given however many children there are, and it normally goes to the parent with the higher income. But the details are turning out to be an accountant’s dream – and a taxpayer’s nightmare.

It will go to some men who aren't fathers. And some parents on £65,000 a year will get it, others on £41,000 won't

First there is a cohabitation rule – the first ever in a tax allowance. The person claiming the credit must declare if they are living as a couple with another person of the opposite sex, whether they are married or not. The person with the higher income will normally get the credit. The partner with the lower income can get the credit, but only if both partners agree to that. If the person with the lower income claims it without the agreement of the other partner, then the credit is split between them.

The cohabitation rule is needed because the credit is means-tested. The Children's Tax Credit is only paid in full to someone who does not pay higher rate tax. This year, that starts on an annual income exceeding £32,785. If your income is higher than that, then the £442 credit is reduced at the rate of £1 for each £15 of income above the limit for higher rate tax. On this year’s rates that would mean the allowance would disappear as income reached £39,415. But both the credit and the limit for higher rate tax are expected to rise in the Budget, so by April, when the credit begins, it will probably be withdrawn completely from anyone whose income is around £41,000.

Where one partner pays higher rate tax then the other partner CANNOT claim the credit at all, the partner who pays higher rate tax has to do so and face the means-test. So if either partner pays higher rate tax the Children's Tax Credit is reduced and if either has an income above £41,000 then the credit will not be paid at all.

Only the income of the higher earner is taken into account for the means-test. So a couple with an income of £65,000 split evenly between them could get the credit in full. But if only one partner worked, they would lose the credit completely as their income reached around £41,000.

These rules have serious implications for a single mother who falls in love and is considering sharing her life with a new partner. First, she has to inform the Inland Revenue of a change in circumstances – failure to do so could result in a fine of up to £400. If her new man has a higher income than her, then he would normally get the credit for the rest of the tax year. Even if she insisted, he could keep half the credit without her consent. So an unrelated man who was not supporting the child could get half or all the tax credit instead of the child’s natural mother. And if he pays higher rate tax, it is even worse. He HAS to claim the credit and, if his income is higher than around £41,000, then the credit stops at once.

These problems will get worse in two years time when the Government intends to abolish child benefit and combine it with the Children's Tax Credit to create what it calls an integrated child credit. That will take child support completely away from the mother in most cases and give it to her partner – whether he pays for the children’s upkeep or not.

The Chancellor is widely expected to increase the credit in his Budget, probably to £520 – a nice round £10 a week. That will be paid as a straight cut in the income tax due – if it is claimed now the tax deducted under PAYE will be reduced. Self-employed people will not get any of the credit for 2001/02 until they fill in their self-assessment forms and pay their tax before 31 January 2002. If a child or a partner moves in – or out – or is born and the entitlement to the credit changes, then it is apportioned for each part of the tax year.

People born before 6 April 1935 still have the right to a married couple's allowance, which was abolished for everyone else last April. If they also have a dependent child living with them, they must choose between Children's Tax Credit and married couple's allowance. For most people the married couple's allowance is more valuable. But that allowance is reduced for people with an income above £17,600. So it is possible that the Children's Tax Credit, which is paid in full up to a much higher income, will be worth more.

17 February 2001

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