The Chancellor has proposed that two new tax credits – the Child Tax Credit and the Working Tax Credit – will be introduced from April 2003.
- 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 of less then £13,000 while all families with incomes of 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.
It has been stated that 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.
Until the new credits are introduced the current tax credits eg. children's tax credit and working families tax credit will remain. The children's tax credit is increased to £5,290 for 2002/2003 and the children's tax credit at the baby rate is £10,490. These two credits give a reduction in income tax otherwise payable at the rate of 10% eg. a maximum of £529 for the children's tax credit.