REV 3

17 April 2002

NEW TAX CREDITS:  A £2.7 BILLION BOOST FOR FAMILIES AND THE LOW PAID

Two new tax credits - the Child Tax Credit and the Working Tax Credit - will be introduced from April 2003 providing an additional £2.7 billion to support families with children, tackle poverty and make work pay.

Announcing the rates and thresholds for the new tax credits, the Paymaster General, Dawn Primarolo said:

"The Child Tax Credit and Working Tax Credit modernise the existing tax credit system to improve support for children whether or not their parents are in jobs and to make work pay. We are determined to build a tax system fit for the 21st century and these new credits mark a radical step forward in our tax and benefit reforms."

• Child Tax Credit will combine all income-related support for children and will be paid direct to the main carer, usually the mother, creating one system of support spanning welfare and work;
• The Working Tax Credit will provide a guaranteed income from full-time work for those aged 25 or over without children or a disability of £183 per week for couples and £154 per week for single people;
• The Child Tax Credit will provide a total of £13 billion in support, benefiting around 5.75 million families;
• For the first child, universal Child Benefit and the Child Tax Credit will provide £54.25 a week to all families with incomes less then £13,000 while all families with incomes less than £50,000 are guaranteed £26.50 a week;
• Child Tax Credit will be extended to some who are currently excluded from all but Child Benefit such as students and student nurses;
• From April 2004, the child elements of the Child Tax Credit will be uprated at least in line with earnings rather than prices for the rest of the Parliament.

The Child Tax Credit brings together the various strands of support for families with children - the child elements in Income Support, Jobseeker's Allowance, Working Families' Tax Credit (WFTC), Disabled Person's Tax Credit (DPTC) and the Children's Tax Credit - into one streamlined system.

The Working Tax Credit will broadly replicate the adult support in WFTC and extend the principles of WFTC and DPTC to adults without children to create one transparent instrument to make work pay, paid through the wage packet. It will also include support with the costs of childcare, building on the success of the existing childcare component of WFTC and DPTC.

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NOTES FOR EDITORS

The new tax credits will offer recipients a number of advantages over  the current systems of support. Compared to the current WFTC and DPTC, the main advantages are:

• greater generosity - a single earner couple working full-time at the National Minimum Wage with two children will receive around £400 a year more from the new tax credits compared to WFTC and the existing Children's Tax Credit;
• less form filling - families will have one renewal each year, rather than two; and
• better incentives to save - families will no longer be unfairly penalised for having savings. The system will treat income from savings just like any other income. For example a single earner family earning £18,000 with £6,000 of savings (generating £300 of interest a year) would gain over £14 a week from the new tax credits, mainly as a result of the abolition of the capital rules.

Families receiving Income Support or income-based Jobseeker's Allowance (IS/JSA) will automatically receive full Child Tax Credit. For them, the main advantages are:

• greater generosity - compared to the child allowances in IS/JSA. For example, most families with two children on IS/JSA will gain over £9 a week from the Child Tax Credit; and
• more security on the move into work - families continue to receive Child Tax Credit when they return to work without the need to reapply. The Child Tax Credit will be paid at the maximum rate for all families until income reaches £13,000 a year, delivering a secure stream of income for families moving off welfare and into work.

Compared to the current Children's Tax Credit, the new tax credits will offer a number of advantages:

• payment to the main carer - the Child Tax Credit will be paid direct to the main carer, usually the mother, providing a secure and regular stream of income; and
• a fairer system - awards will be based on the income of the family, so one and two earner couples on the same income will be treated the same. For example, under the Child Tax Credit a single earner family on £40,000 will receive £545 a year, the same as a couple where both earn £20,000 and £320 a year more than they would have received from the Children's Tax Credit.

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The Child Tax Credit

The Child Tax Credit replaces the income-related child elements of out of work benefits (Income Support and Jobseeker's Allowance), the Working Families' and Disabled Person's Tax Credits and the Children's Tax Credit, building on the foundation of universal Child Benefit. The Child Tax Credit will provide £13 billion of support, benefiting around 5.75 million families.

The new system will offer families with children a number of benefits over the current systems of support. The Child Tax Credit will provide:-

• a continuous stream of income for families with children, which does not depend on the work status of the parents, creating a stable income bridge when families move into work;
• extended eligibility, to some who are currently excluded from all but Child Benefit, such as students and student nurses;
• · a system in which all support for children is paid direct to the person with main responsibility for the child's care, in line with Child Benefit;
• a more transparent system which brings together all income-related child payments into a single payable tax credit administered by the Inland Revenue;
• greater flexibility, enabling families to continue to access support from one system, even as their incomes rise or circumstances change; and
• a common framework for assessment, so that most families are part of a single, inclusive system ending the stigma often associated with more traditional forms of support.

Budget 2002 announces the rates and thresholds for the new tax credits (fully detailed in the Annex). As an illustration for families with two children, Child Tax Credit and Child Benefit will work together to provide:

• at least £26.80 a week in support guaranteed for all families;
• £37.25 a week in support guaranteed for families with an income of less than £50,000; and
• £92.75 a week in support guaranteed for families with an income of less than £13,000 a year.

In advance of the introduction of the Child Tax Credit, the child allowances in Income Support and Jobseeker's Allowance will be brought into line with those in Working Families' Tax Credit from October 2002, providing an increase of £3.50 a week.

The Working Tax Credit

The Working Tax Credit will make work pay for low income workers.  It replaces the Working Families' Tax Credit, Disabled Person's Tax Credit and New Deal 50 plus Employment Credit.  It improves on these forms of support by:

• increasing the minimum income guarantee for a single disabled person working full time from £172 a week now to £194 a week in April 2003; and
• improving the work incentives of second earners in couples with children, for example, in a family with two children where the first earner has an income of £14,100 (half average earnings) and the non-working partner takes a part-time job at typical entry wages, the gain to work will increase by over £14 a week in 2003-04 compared to the current system.

The Working Tax Credit will also for the first time extend support to those aged 25 or more without children or a disability where they work at least 30 hours a week. For this group, the Working Tax Credit means:

• a guaranteed minimum income from full-time work of £183 for couples and £154 for single people; and
• improved gains to work - for a couple where one person moves into full-time work, the gain to work will rise to nearly £50 a week compared with £20 now.

Budget 2002 announces the rates and thresholds that will apply to the Working Tax Credit from April 2003  (fully detailed in the Annex). In advance of the introduction of the new tax credits, the basic credit in the Working Families' Tax Credit and the couple and lone parent credits in the Disabled Person's Tax Credit will rise by £2.50 from June 2002.

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Responsive tax credits

The Working and Child Tax Credits will be based on annual income for a tax year and will run for up to 12 months.  They are designed to combine continuity of support for those whose circumstances are stable, with the flexibility to respond quickly for those who are experiencing change.

At the start of the tax year or the start of a claim, the tax credits award will be based on the current circumstances (for example, number of children, hours worked) of the individual or couple claiming and on their income for the last tax year. Those with income below the first withdrawal threshold will be paid the full amount of tax credits available for their circumstances.  Those who qualify for Income Support or income-based Jobseeker's Allowance will also be entitled to maximum Child Tax Credit, without a further income test.

Those with income over the threshold will have their maximum tax credit award reduced by 37p for every pound of income (before tax and NICs) over the threshold. Claimants eligible for both the Working Tax Credit and the Child Tax Credit will have their maximum awards reduced in the order:

• Working Tax Credit apart from childcare;
• The childcare element of Working Tax Credit;
• Child Tax Credit apart from the family element; and finally
• the family element where income exceeds the higher threshold of £50,000

That means that Working Tax Credit paid through employers is the first to be withdrawn, so that for many families with children, tax credits will be paid wholly to the person with main responsibility for the child's care.

Once an award has been set, it can run until the end of the tax year when entitlement will be reviewed.  But if there is a change affecting the maximum available amount of tax credit, the tax credit award can be adjusted from the point of the change. 

An award can also be adjusted if income in the current year falls in comparison with last year.  This will help people who have a fall in income to stay in work.  Awards will also be based on the income of the current year if income rises in comparison with the previous year.  But to maintain the incentive to increase earnings, rises in income of up to £2,500 will be ignored and only the rise in income over £2,500 can trigger a reduction in a tax credit award.

For more details see The Child and Working Tax Credits  (PDF file), published by HM Treasury today

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Working Tax Credit and Child Tax Credit - Ensuring A Smooth Transition

The Government wants to ensure that people receiving one of the current tax credits, who will be eligible for one or both of the new credits make a claim for the new tax credits in good time and do not experience any gaps in support.  To this end, a number of changes are being made this year to prepare for the transition.

Claims for Working Tax Credit and Child Tax Credit

Subject to the necessary legislation being approved, later this year, the Inland Revenue will begin writing to all those currently receiving one of the existing tax credits inviting them either to apply for the new tax credits on-line, or to complete and return the paper form they will be receiving. Help will be provided both on-line and with the form and additional support will be available by phone or in person at local Inland Revenue offices. The Revenue wants to ensure that all those eligible for the new tax credits claim as soon as possible so that they will start to receive payments in April 2003.

People not currently receiving tax credits but who think they may be eligible will be encouraged to go on-line and check their eligibility. If they find they are entitled to tax credits, they will be able to make their application electronically - there and then.  Otherwise, people will be able to able to ring up for a paper form, or pick one up from Inland Revenue Enquiry Centres. An extensive publicity campaign is planned to help ensure no-one misses out.

Special Arrangements for WFTC and DPTC recipients

To avoid people having to renew their tax credit awards for relatively short periods in the run-up to April 2003, and help ensure a smooth transition to the new tax credits, awards of WFTC and DPTC will be lengthened from this summer.

From June this year, all new awards of WFTC and DPTC will run until 7 April 2003 instead of the normal 26 weeks.  This will mean that no-one will have to re-apply for WFTC or DPTC from December 2002 onwards for an award which would last for less than four months. 

To ensure that all WFTC and DPTC awards end on 7 April 2003, to coincide with the introduction of the new tax credits, awards starting on or after 15 October 2002 will be shortened and will run to that date.

Changes to social security benefits

Child Tax Credit will replace the child elements of Income Support, including the Minimum Income Guarantee, and income-based Jobseeker's Allowance and the support for children currently provided within certain other benefits.  The Child Tax Credit replaces Child Dependency increases paid in non-means tested benefits for new claims to Retirement Benefit, Bereavement Benefit, Incapacity Benefit (including residual Severe Disablement Allowance) and Invalid Care Allowance. Existing recipients will have their entitlement transitionally protected.

For families who receive income related benefits, continuity of payment will be of particular importance. The Government has, therefore, decided that there will be a transition period for people on these benefits, to minimise the risks in this area. Current plans are for:

• families with children on the Minimum Income Guarantee to be migrated to Child Tax Credit by October 2003, to coincide with the planned introduction of Pension Credit; and
• families on Income Support or income-based Jobseeker's allowance to be migrated to Child Tax Credit from April 2004.

Families will not be disadvantaged by the transition period. The rates of the child elements within the income related benefits will be adjusted so that families receive the same amount in respect of their children as they would if they were receiving Child Tax Credit. For the vast majority of families in this position, there will be no need for them to claim Child Tax Credit until they move into work.   If they are still on benefit when the migration begins, the Department for Work and Pensions will handle their cases automatically.

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Helping Employers

Paying WFTC and DPTC through the wage packet has been a key element in delivering on the promise to make work pay. The Government is committed to that principle, which is why the new Working Tax Credit will be paid to employees through the wage packet, providing a clear and targeted top-up to wages.

But the Government also wants to ensure the transition to Working Tax Credit runs smoothly for employers.  The system for paying Working Tax Credit through the wage packet will build on the successful WFTC system.  But there will be some key simplifications to the system which will together save employers £11 million annually.

To allow employers time to adjust to the new system and to smooth the transition to the Working Tax Credit for claimants, payments of WFTC and DPTC by employers will gradually be phased out from 27 August.  All awards of WFTC and DPTC in place before 27 August will be paid as normal for the first 26 weeks, but the Inland Revenue will make the remaining payments up to 7 April 2003.  Awards which begin on or after 27 August will be paid direct by the Inland Revenue throughout.

Employers should not, therefore, have to make payments of WFTC or DPTC alongside the new Working Tax Credit.  This will ensure that payment of the Working Tax Credit through the wage packet is introduced with minimum disruption to employers and employees.

More detail about the Working Tax Credit and the Child Tax Credit and how the new system will work is available in a new document, The Child and Working Tax Credits, published today by HM Treasury and the Inland Revenue.

HM TREASURY PRESS OFFICE

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GOVERNMENT DEPARTMENT INTERNET SITES

Further information and all published documents relating to Budget 2002 may also be found on the Internet at the following address:

Inland Revenue  www.inlandrevenue.gov.uk
 

PRESS NOTICE ANNEX

Rates and thresholds

The rates and thresholds of the new tax credits are shown in the table below.

Notes

1. Apart from those mentioned in the footnote below, the elements for which claimants are eligible can be added together to arrive at the maximum amount of tax credit available. 

2.  These elements are mutually exclusive.  Where an individual works enough hours to qualify for the 50plus return to work payment (30+ hours), they cannot also qualify for the 50plus return to work payment (16-29 hours).

Notes

1.   Only one family element is available per family. Families are entitled to the family element and the baby addition in the first year of a child's life. 

2.  As well as one family element, a family will be entitled to a child element for each child for whom it has responsibility.  For each child, the child elements which are appropriate may be added together to arrive at the maximum amount available for that child.

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Budget 2002 Press Notices: index