Tax credits reaching record numbers of low income families and tackling child poverty

Take up of tax credits is higher than for any previous system of financial support for families according to new research published by the Government today.

New statistics on take-up of Tax Credits in 2003-04, their first year of operation, show that record numbers of families are claiming tax credits:

79 per cent of the families entitled to Child Tax Credit claimed it in the first year, while the proportion of the money claimed was even higher, at 87 per cent.
Low-income families were most likely to take-up their entitlement. For families with children earning less than £10,000 the level of take up was 93 per cent, while 91 per cent of working lone parents claimed.

Tax Credits are more generous and benefit many more families than previous systems such as Working Families Tax Credit or Family Credit. But looking at take-up amongst the most comparable group – families with children and on low incomes – the take-up figures show that, even in their first year, Tax Credits were much more effective than previous systems at reaching these families, providing support where it is needed most.

Eighty nine per cent of these families claimed tax credits in 2003-04, a higher level of take-up than WFTC and significantly higher than Family Credit, for which take-up was just 57 per cent in its first year and peaked at 71 per cent in 1993-94.

Commenting on the statistics, Paymaster General Dawn Primarolo said:

“Tax credits are reaching more families than any previous system of financial support, with nearly 20 million people benefiting from them. With take-up rates for low income families with children of 89 per cent, the tax credit system is improving work incentives and tackling child poverty.”

Under the new Tax Credit system, for the first time, financial support has been offered to all low-income working households, including those without children or a disability. The research shows that take-up in the first year of tax credits among families without children was significantly lower than for those with children, with 13 per cent of those entitled claiming. This partly reflects the lower level of entitlement for this group, but also the challenge of reaching an entirely new group. However, the numbers claiming tax credits in this group has been rising quickly as more people understand that tax credits are available to all workers on lower incomes, which means take-up rates will be higher in future years.

The Government is committed to continuing to improve the tax credits system to make it more responsive to families' needs. There have been a series of improvements to resolve IT and administrative problems and give claimants a better service. New measures were announced in the 2005 Pre-Budget Report and will start to take effect this April. The Government will also do more to ensure that everyone claims the money they are entitled to, building on existing work to communicate with current and potential claimants.

Income tracking

Research from the London School of Economics, partly funded by HMRC and HMT, was also published today. It shows that a responsive system of tax credits helps to smooth income, particularly for disadvantaged groups such as lone parents.

The research also finds that many families experience instability in their incomes over time and, while recognising the challenges posed by a responsive annual system, says that basing tax credit payments solely on previous levels of income would be “rough justice”.

Notes to editors

1. A comparison between take-up rates for the current tax credit system and its predecessors is below:

First year take-up rate

Family Credit (1988)

57%

WFTC

65%

Current tax credits (2003)

- Low income families in work (Child Tax Credit and Working Tax Credit)

- Child Tax Credit

89%

79%

2. The income tracking research is entitled “Tracking Income: How Working Families’ Incomes Vary Through the Year”. The authors are Professor John Hills at the Centre for Analysis of Social Exclusion at the London School of Economics, together with his colleagues Rachel Smithies and Abigail McKnight. The report is available on the HMRC website .

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