132/01
29 November 2001
DETAILS ANNOUNCED OF NEW TAX CREDITS TO MAKE WORK PAY, SUPPORT CHILDREN AND TACKLE POVERTY
Details of two new tax credits to support work, help families with children and tackle poverty were announced today by Treasury Minister Dawn Primarolo. This is the next step in the Government's major reform of the tax and benefits system.
A Bill to introduce the new tax credits was published today, setting out the legislative framework for the Child Tax Credit, for families with children, and the Working Tax Credit for low-income working households, including those where a worker has a disability. The credits are to be introduced from 2003.
The new tax credits will provide a simpler and more streamlined system.
Announcing the details, Ms Primarolo said:
"The Government is delivering on its promise to introduce a new streamlined system of tax credits to move forward on our commitments to eradicating child poverty and making work pay. Our tax and benefits reforms have helped ensure that more low-income families keep more of what they earn, and our reforms to improve work incentives are tackling the vicious unemployment and poverty traps. The new tax credits are key elements in achieving these aims.
"We are building on the success of the Working Families' and Disabled Person's Tax Credits, which benefit nearly 2.5 million children in 1.25 million families already, providing around £35 more a week compared to their predecessors. The new streamlined system will provide a secure stream of income for children, whether parents are in and out of work, helping people make the move into work and removing stigma from support for children."
In the light of responses to a consultation exercise over the summer, a number of issues about the design of new tax credits have been confirmed:
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the Child Tax Credit will be paid directly to the main carer, in line with Child Benefit;
- the principle of in-work support will be extended to those without children through the Working Tax Credit, which if based on the levels of the current systems of support, would benefit up to 400,000 low income working people without children;
- by creating a single, seamless system of support for families with children, the Child Tax Credit will extend support to around 100,000 families currently excluded from all but Child Benefit, including groups such as students and student nurses;
- the Child Tax Credit will support children up to the September following their 16th birthday. It will also support the families of young people up to the age of 19 who are in full time education;
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couples with children will be allowed to sum their hours together to qualify for the 30 hour credit;
- there will no capital limits for the new tax credits;
- the childcare element of Working Tax Credit will be paid direct to the main carer;
- payments of child maintenance will continue to be excluded from income for tax credits purposes;
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tax credit payments should be able to adjust in response to changes in income - but there will be further discussion about how this would work.
Other points in response to the consultation exercise are set out in the attached paper. The Government will continue discussions on the detail of the system as the regulations to support the Bill are drawn up.
The Bill also provides for the transfer of responsibility for Child Benefit and Guardian's Allowance to the Revenue. The transfer, announced by the Prime Minister in June, will bring Government support for children within a single Department.
DETAILS
1. The Chancellor announced the introduction of the new tax credits in his 2000 Budget.
2. The new credit for families with children, the Child Tax Credit, will provide a single system of income-related support for families, in work and out of work, building on the foundations of universal Child Benefit. Because there will be no work requirements for the Child Tax Credit, it will provide support to some groups with children who are currently excluded - such as student nurses.
1. The Working Tax Credit will provide support for workers in low-income households, including those who have disabilities. It will broaden the scope of support to include households where there are no dependent children or young people.
Consultation
2. The Inland Revenue published a consultation document - New tax credits; supporting families, making work pay and tackling poverty - on 19 July 2001. During the consultation period, a number of meetings were held around the UK to give interested groups a chance to ask questions and give their views. The issues raised at those meetings, and set out in over 170 written responses, have influenced the shape of the Bill and will also be instrumental in shaping the finer detail of tax credits policy.
3. The report published today about the consultation sets out how organisations and individuals responded to the tax credits proposals and summarises the responses to questions raised in the consultation paper.
4. Copies of the document can be obtained :
By post from: By personal callers to:
Sandra Bevan, Inland Revenue Visitor's Information Centre,
Inland Revenue, Ground Floor,
Room 69, South West Wing,
New Wing, Bush House,
Somerset House, Strand,
Strand, London WC2R 1LB London WC2B 4RD
Tel: 020 7438 8270
Fax: 020 7438 6906
E-mail Sandra Bevan at the address below
Also over the Internet from the address below
The Shape of New Tax Credits
5. In response to consultation, the Government announced today that:
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the Child Tax Credit will provide support for children until 1st September following their 16th birthday, as a matter of course. Beyond that date, support will be available up to the age of 19 for young people who continue in full-time non-advanced education.
- the new tax credits will not restrict eligibility to those with capital below certain thresholds. Actual income from capital will be taken into account as income for tax credits purposes. There will be further discussion on the level of the threshold below which small amounts of income should be ignored.
- payments of child maintenance will not be treated as income of the recipient for tax credits purposes. Disregarding child maintenance payments in this way has been a successful feature of the Working Families' and Disabled Person's Tax Credits, making work pay for lone parents going back into work.
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payments of the new tax credits will be able to respond to significant falls or rises in income during a tax credits award. The consensus in consultation was that flexibility to reflect changes in a family's income was important. But there was also concern about precisely how this would work in practice. The Bill published today will make possible a flexible approach to responding to income change. The Government wishes to discuss the detail of this part of the system with interest groups as draft regulations are drawn up.
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support for child care costs, which will be an integral part of the Working Tax Credit, will be paid direct to the main carer for children, alongside the Child Tax Credit. The rest of the Working Tax Credit will generally be paid to employees through their employer.
6. The Government also announced today some detailed points about the shape of the new tax credits:
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As proposed in consultation, the Child Tax Credit will be available for a period after the death of a child for which it is claimed. In the light of consultation responses, the period will be 8 weeks rather than 6. The rules for Child Benefit will also be amended in the tax credits Bill to allow an extension of Child Benefit entitlement for 8 weeks.
- The premium for working full-time within the Working Tax Credit (defined as 30 or more hours work a week) will be available to couples with children whose joint working hours exceed the threshold. This will make it easier for these couples to share responsibility for looking after their children.
- There will be minor changes to some Child Benefit rules, to bring them more closely into line with the Child Tax Credit. These include:
- removing the requirement for both a child and a claimant to have been in the UK for at least 182 days before qualifying for Child Benefit and
- removing the exclusion from Child Benefit of people who have income exempt from UK tax or a partner with such income.
7. A great many more detailed points about the shape of new tax credits were made in response to consultation. These will be taken forward in discussion with interest groups as secondary legislation is drafted.
NOTES FOR EDITORS
8. In Budget 2000, the Chancellor announced the introduction, from 2003, of two separate income tax credits:
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a Working Tax Credit - to tackle in-work poverty and improve work incentives, by making work pay for those in low-income households or with disabilities; and
- a Child Tax Credit for families with children - building on the foundations of universal Child Benefit, by providing a seamless, secure system of income-related support for families with children, whether that family is in or out of work.
These credits will replace the existing credits (Working Families' and Disabled Person's Tax Credits, Children's Tax Credit, the New Deal 50plus Employment Credit) and the child-related payments in Income Support and income-based Jobseeker's Allowance.
9. The Working Tax Credit will be paid by employers along with wages. It will support the adults in low-income households, including those in which workers have a disability. It will consist of a basic element for all those who are eligible, to which other elements related to claimants' circumstances may be added. For example, there will be additional elements for workers who have a disability or for working a certain number of hours a week. The Working Tax Credit will also include an element for the costs of childcare, building on the support available already through the Working Families' Tax Credit and Disabled Person's Tax Credit and helping to remove barriers to work. Unlike the rest of the Working Tax Credit, however, the childcare element will be paid direct to the main carer for the children.
10. The Child Tax Credit will be paid direct to the main carer for children in a family. It will be payable whether or not the adults in the family are in work, providing a secure stream of support as people move into work. The Child Tax Credit will include a family element, which will be higher for families with a child aged under 1, and individual credits for children or young people in the family. Higher credits will be payable for children or young people with a disability or a severe disability.
11. The Inland Revenue consultation document was issued in accordance with the Government's code of practice on written consultation set out in the Cabinet Office booklet 'Code of practice on written consultation' published in November 2000.
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NEW TAX CREDITS: SUPPORTING FAMILIES, MAKING WORK PAY AND TACKLING POVERTY - THE RESPONSE TO CONSULTATION
THE POLICY CONTEXT
Introduction
1. The Government launched its consultation on new tax credits on 19 July 2001 with a deadline for responses of 12 October. During September and early October, a number of consultation meetings were held around the United Kingdom to discuss the issues raised by the consultation and provide an opportunity for interest groups to clarify the proposals. The consultation also included many formal and informal meetings with a range of interest groups. Over 170 written responses were received.
2. It was important to obtain a wide range of views from as many interested parties as possible and the issues raised, both in written comments and in the meetings, have been very helpful to Ministers as they made final decisions for the Tax Credits Bill, published today. The comments will continue to inform decisions about the supporting legislative framework for the new tax credits. Many of those who commented wanted to continue to be involved as the detail was developed, and we anticipate continuing informal discussions as some of the more detailed aspects of the new credits are made clear during the passage of both the primary and secondary legislation and as the new tax credits are implemented.
3. This report provides a summary of the points raised during the consultation and outlines the key decisions made as a result of the responses received to the consultation document.
The new tax credits
4. The Tax Credits Bill sets out the legal framework for two new tax credits:
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the Working Tax Credit, which extends the principle of making work pay to working households without children; and
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the Child Tax Credit, a single seamless system of support for families with children, whether in- or out-of-work, which builds on the foundations of universal Child Benefit.
5. This next phase of reform separates the support for adults in a family from support for the children, providing a clearer focus on the two aims of making work pay for those in low-income households, including those without children, and tackling child poverty and providing financial support for families.
6. The Working Tax Credit is geared to tackling persistent in-work poverty and improves work incentives, by making work pay for those in low-income households, whether or not they have children. It will be paid by employers along with wages, although the childcare element will be paid direct to the main carer.
7. The Child Tax Credit will be payable whether or not the adults in the family are in work - a single seamless system spanning the in-work/out-of-work divide - which will reduce the stigma associated with more traditional forms of support. Because there will be no work requirements, the Child Tax Credit will provide support to around 100,000 parents who are currently excluded from all income-related forms of support, including students and student nurses. It will be paid direct to the main carer, most often the mother.
Background
8. The unemployment trap has traditionally been of greatest concern for families with children. That was why the Government introduced the Working Families' Tax Credit in October 1999, thereby improving the gains to work for low to middle income families with children.
9. However, people without children can also face poor work incentives. At a typical full-time entry wage, a workless couple with one child would be nearly £50 better off in work than on benefit, but a couple without children would only be around £20 a week better off. Putting this another way, in order to be £40 a week better of in work, a couple with one child needs to earn around £160, while a couple with no children needs to earn a third more, around £215 a week.
10. The Government has a long-term goal to halve child poverty by 2010 and to eradicate it within a generation. By the mid-1990s, around one in three children lived in a low-income household. The Government therefore embarked upon a radical programme of tax and benefit reform to support all families with children, and there are now over 1 million fewer children in relative poverty than there would otherwise have been.
11. But there remain over 1 million people without children living in households where someone is in work, but with household income below 60% of the median. By extending in-work support to those without children, the Working Tax Credit will help tackle this.
12. At the same time, the introduction of the Child Tax Credit will provide families with children with a single integrated source of income-based support for children. Building on the foundation of universal Child Benefit, the Child Tax Credit will provide a common framework for targeted support to families.
THE RESPONSE TO CONSULTATION
General
13. Over 170 responses from groups ranging from representatives of business to local childcare partnerships and disability groups were received, providing a wide range of views on the issues raised by the consultation document.
14. People who responded generally welcomed the aims and objectives of the new tax credits and saw them as an effective way of tackling poverty and improving work incentives. There was broad support for the proposals set out in the consultation document. The rates and thresholds of the tax credits will be set by the Chancellor in his 2002 Budget.
Support for families with children - the Child Tax Credit
15. The proposal for a single seamless framework of support for all those with children, whether working or non-working, including students and student nurses, was overwhelmingly supported.
EXTENDING ENTITLEMENT TO THE CHILD TAX CREDIT
16. The more detailed proposals for extending support where a child dies or is taken into hospital for a prolonged period, and for allowing support to continue where a child is placed with a family whilst in Local Authority care were also welcomed by the vast majority of respondents. In light of the strong support for these measures, entitlement to the Child Tax Credit will continue for a period after a child's death or whilst the child is in hospital. In light of representations made during the consultation, entitlement to Child Tax Credit will be extended for 8 weeks after a child dies.
SUPPORTING YOUNG PEOPLE
17. The majority of respondents favoured unconditional support for children continuing until the September after they reach 16 and also welcomed the proposal to continue support through the Child Tax Credit for families who have 16 to 19 year olds in full-time education. Some would prefer support to continue for longer. The Child Tax Credit will be available until the September after a child is 16, and until 19 if a young person remains in full-time non-advanced education.
Support for low-income households in work - the Working Tax Credit
18. Views from respondents on the tax credit for low-income working households were more mixed. In general, there was support for the principle of providing a top-up to the wages of those in low-income working households through a tax credit, although some respondents were unsure of the case for extending such support to those without children or a disability. As explained above, over a million people in working households without children remain in poverty. The Government is committed to making work pay for all households which is why the Tax Credits Bill provides for a Working Tax Credit which is more widely available.
19. Disability groups all favoured the single work-focused credit covering workers with a disability and ensuring the linking rules continue to allow claimants who fall out of work to retain their rights to previous levels of benefits. In the light of these views, the Tax Credits Bill provides that workers entitled to the disability element of Working Tax Credit will have access to the linking rules in disability benefits so long as they receive a certain level of Working Tax Credit or Child Tax Credit. Generally, respondents also supported the proposal to integrate the New Deal 50plus Employment Credit into the Working Tax Credit. The Working Tax Credit will therefore include an element for those aged 50 or over who return to work after a period on certain out-of-work benefits. The Working Tax Credit therefore becomes the single vehicle for delivering a top up to the wages of low-income workers.
PAYING THROUGH THE WAGE PACKET
20. Some, principally those representing employers, raised concerns about continuing to require employers to pay Working Tax Credit through the wage packet. However, many business representatives supported, as useful and welcome simplifications, the proposals to simplify the system for paying tax credits with wages by moving to an annual system based around the tax year. We will continue to work closely with employers groups in developing the details of the system to ensure it is as easy to operate as possible.
CALCULATING WORKING HOURS
21. We received few views on an appropriate test for deciding 'working hours', and most acknowledged the inherent difficulties given today's more flexible working patterns. Respondents recognised that this is a difficult area and we will continue discussions to find the most appropriate measure which does not impose unreasonable burdens on the claimant when deciding whether or not they qualify for in-work support.
COMBINING WORKING HOURS
22. The majority of respondents were in favour of the proposal to allow couples with children to add their working hours together, to qualify for the 30 hour premium. Those who expressed doubts were generally concerned that single parents and people with other caring responsibilities would not benefit. On balance, the Government has decided that the rules for the Working Tax Credit should allow couples to add their hours together in this way.
CARING RESPONSIBILITIES
23. People who responded supported a careful examination of how to revise the eligibility criteria for workers with a disability and how to provide support for those with other caring responsibilities. Some responses provided possible definitions of "carer" which could be used in enabling tax credits to provide extra help to those with caring responsibilities. This is an area we are continuing to look at, and discuss with interested groups, alongside other departments who also have responsibility for the way support is provided to these households.
SUPPORT FOR CHILDCARE COSTS
24. The Tax Credits Bill provides for the Working Tax Credit to include an element to help with the costs of childcare. Some respondents to the consultation thought that the childcare element should link to the Child Tax Credit rather than the Working Tax Credit, but most agreed that it should retain the link to work as its purpose was to remove barriers to work.
25. Most respondents supported paying this element of the Working Tax Credit direct to the main carer, and the Government has decided that the childcare element of the Working Tax Credit should be paid direct to the main carer, usually the mother, whether weekly or four weekly, alongside payments of the Child Tax Credit.
26. A small number of respondents wanted to see payment direct to childcare providers. However, most recognised that all parents should be able to exercise choice when paying for childcare so that those receiving tax credits made payments to their provider in the same way as other parents. It was also widely felt that payment to the provider would restrict the ability to respond to changes.
27. In general, people commenting thought that the system should respond to changes in childcare need, whether more or less, and that it was reasonable to expect parents to be responsible for notifying those changes. Most appeared content that the parent should provide the details of costs, without routinely requiring confirmation from providers, but subject to the Revenue's right to check details with the provider. There was a strong view that the system for assessing costs should be as straightforward as possible to reduce the risk of parents making mistakes. We will continue to discuss the details of the way the childcare element will operate with interested groups.
A TARGETED MEANS OF SUPPORT
28. Most respondents were content with the proposal to base income for tax credits purposes on gross income (of both partners, for couples) and broadly to follow the tax treatment of income. But views were mixed on whether earnings income should include benefits-in-kind, the most popular option being to take account only of the main benefits at this stage.
29. There was almost unanimous support for ignoring income from child maintenance payments or from third parties such as children and for the removal of capital limits. Responses noted that this differed from the treatment under social security benefits, but acknowledged the differences in scope and objectives between the new tax credits and existing benefits and welcomed the move towards a system that provided incentives to work and save at the same time.
30. Details of the income rules for the new tax credits will be set out in secondary legislation but Ministers have decided, in the light of representations received, that:
- entitlement to tax credits will be based on gross income;
- maintenance payments will not be counted as income for tax credits purposes; and
- there will be no capital limits in determining eligibility for the new tax credits.
How the system might work
31. Everyone recognised that there was a need to respond to changes in income - both up and down. The proposal to introduce a more flexible system that responds to changes was widely welcomed. However, many thought that a responsive system could be more complex and some also raised the risk of overpayments if claimants were required to estimate year income and got this wrong. Respondents agreed that there would need to be very clear and simple advice for claimants. Although many suggested that the new credits should respond to reasonably small falls but only large increases in income over a year, very few felt able to provide a guide to the levels of change in income that should trigger an adjustment. The Tax Credits Bill provides for a flexible approach in responding to changes in income, and we will discuss the details with interest groups as draft regulations are drawn up.
Bringing the tax and benefit systems closer
32. As identified in the consultation paper, a major area of concern was the interaction of new tax credits with other benefits, most notably Housing Benefit and passported benefits. For Housing Benefit, the majority of proposals related to reform of the Housing Benefit system, and we will be feeding these comments into work on that benefit. DWP colleagues are discussing the operational interactions between the new tax credits and Housing Benefit with local authorities' representatives. On wider passported benefits, the main proposal was to link a wider range of passported benefits to entitlement to new tax credits. The Revenue is continuing discussions with the relevant departments.
NEXT STEPS
33. The next stage in the development of new tax credits is to put the legislative framework into place. The Tax Credits Bill, published today, provides the framework for these new tax credits.
34. Treasury Ministers are very grateful to all those who took the time to attend the consultation meetings or feed in their views.
35. These comments have been very helpful in finalising the Bill published today, and in shaping thinking on the secondary legislation which will follow. There will be continued informal discussion on these points as the regulations are prepared.
29 November 2001
Respondents
- Formal responses were received from:
- 14 professional bodies
- 29 children's and family's welfare groups
- 35 childcare groups
- 8 disability welfare groups
- 2 welfare groups for the elderly
- 12 employers representatives and unions
- 6 research organisations
- 29 individuals
- 37 other, including local government and non-governmental organisations