The fact that the children's tax credit would come into force from 6 April 2001 was not a Budget change but the maximum amount of the credit was raised in this year's Budget from its initially proposed level of £4,420 per family to £5,200 per family.
The Children's Tax Credit (CTC) is payable to families (ie. single parents, married couples or unmarried couples living together) where at least one child under the age of 16 is that of the claimant and living with the claimant, or maintained at the expense of the claimant. The maximum credit is (as stated above) £5,200 per family which gives a reduction in income tax otherwise payable, at the rate of 10%, ie. a maximum of £520.
Employees should claim the credit using form CTC1, issued by the Inland Revenue. Relief for the self-employed will be dealt with through the tax return. The claim form states that if there is more than one child “it usually makes sense to claim for the youngest child so that the credit is given without a break for the longest period.” Ideally, the claim form should have been returned by 31 August 2000 but this is not a statutory deadline. It would have allowed time for the form to be processed before the issue of the 2001/02 PAYE code but it is still not too late.
The relief will be means-tested and will be progressively withdrawn if the claimant is liable to higher rate income tax (ie. has taxable income, on current rates, of at least £29,400 which equates to total income of £33,935 before deduction of the standard personal allowance of £4,535). [The relief is then withdrawn at a rate of £1 of credit per £15 of income subject to higher rate tax. This means that where income subject to tax exceeds £37,200 no CTC will be available (£37,200 – £29,400 = £7,800. £7,800/£15 = £520)].
Where the child lives with two persons each person is termed a “partner”. Households where one partner's income which is subject to tax exceeds £37,200, at current rates, will not qualify. Yet where each partner has just under the limit the relief will be due in full even where the joint income is much higher than the £37,200 limit. This is because the legislation requires the “higher-earning” partner to claim. The “higher-earning” partner is the one who has the higher income subject to tax and so where both partners have income subject to tax in excess of £29,400, the one with the higher income will claim. If neither partner has income in excess of £29,400 subject to income tax then they can elect to share the credit equally or allocate the whole to one of them.
From April 2002 the children's tax credit will be increased for the first year by £520 to £1,040 (ie. doubled) on the arrival of a new-born child. Though this is a one-off increase it needs to be taken into account when assessing the potential benefit or potential loss of benefit that will arise on account of the claimant's level of income.
Where there is a chargeable event gain for income tax purposes from the encashment of a non-qualifying life assurance policy, e.g. a capital investment bond, a trap could catch the CTC (in the same way as for age allowance). Top-slicing relief does not apply hence the entire chargeable event gain will be treated as income. This will be disadvantageous where a basic rate taxpayer will be taken into the higher rate band by the chargeable event gain.
The CTC is an addition to child benefit and is designed to replace the married couple's allowance (MCA) which was withdrawn from 6 April 2000 for those couples where neither spouse had attained age 65 before 6 April 2000. Whereas MCA was available to all married couples irrespective of income, the CTC will only be available to such couples with at least one child under age 16 where they satisfy the means-test criteria. It also replaces the additional personal allowance (also withdrawn from 6 April 2000) which was a tax credit for unmarried parents with a child under the age of 16 or over 16 and receiving full-time education, or with a child maintained by the claimant.
Because the “higher-earning” member of a household has to claim the credit it is against the principle of independent taxation of husband and wife as it means both spouses will have to disclose their income to each other, as will unmarried couples.
The introduction of CTC will also mean a new set of marginal tax rates, which can go beyond 50% for dividend income.
WORKING FAMILIES' TAX CREDIT
The basic adult credit component is to increase by £5 per week from June 2001. From the same date, the limits for eligible costs in the childcare tax credit component is to increase to £135 per week for families with childcare costs for one child, and to £200 per week for families with two or more children.