Tax credits are designed to bridge the gap between the tax and social security benefit systems.
The new tax credits – the Child Tax Credit (CTC) and the Working Tax Credit (WTC) – replaced the previous tax credits, which were the Children's Tax Credit and the Working Families' Tax Credit (together with various associated tax credits), from 6 April 2003. The aim is to create a “single income related strand of support for families with children, complemented by a single strand of support for adults in work”. The new credits, and the continuing child benefit which remains in its current form, will be under the care and management of the Inland Revenue.
CTC will be the way that families will get money for their children and the WTC will support working households on low incomes by topping up earnings. WTC is paid in addition to any CTC entitlement.
The new tax credits will be available whether or not the claimant pays tax and will not themselves suffer tax. The tax credits will effectively be means tested as they decrease as income increases. Initially, the amount awarded will be based on current family circumstances and the previous tax year's income (ie. for tax year 2001/2002) and will run for 12 months (in line with the tax year). The amount awarded may be adjusted during the year if income falls or circumstances change.
Income before tax and NICs will be taken into account in the "means test". Income for tax credit purposes is broadly the same as income for income tax purposes but with certain types of income disregarded and certain allowable deductions.
Actual taxable income from capital will be taken into account. There is a de minimis limit which excludes the first £300 of the aggregate of investment income, property income, foreign income and notional income (for example stock dividends which are capital treated as income).
The Inland Revenue have the power to enquire into any award of a tax credit, within set time limits. Where the claimant is required to file a tax return, the time limit will normally expire when the tax return becomes “final”. There are provisions relating to Inland Revenue decisions and appeals, discovery, official error and information requirements. Penalties of up to £3,000 may be imposed in cases of fraud or negligence on the part of either a claimant or an employer required to pay tax credits. A person knowingly concerned in any fraudulent activity in connection with obtaining tax credits will be committing a criminal offence, punishable by imprisonment for up to seven years.
In summary, the main features of the new tax credits are:
2.1 CHILD TAX CREDIT
- Eligibility is assessed on household income.
- All credit is lost at £58,000 (or £66,000 in the year of a child's birth).
- The claimant must be responsible for one or more children aged 16 or under, or at least one child under age 19 and in full-time non-advanced education
- The family element of the tax credit is £10.45 per week and is doubled in the first year of a child's life.
- The child element is £27.75 per week for each child.
- The disabled child element is £41.30 per week (where relevant).
- The Inland Revenue will pay the CTC to the main carer for the child.
2.2 WORKING TAX CREDIT
- The claimant, or one of the joint claimants, must be in qualifying remunerative work.
- The amount of WTC will be based on circumstances which are primarily the number of hours worked and the income of the claimant (or joint income for a couple).
- The age and working hours conditions are not straightforward. Generally, the minimum weekly working requirement will be:
a) 16 hours for families with children and workers with a disability. The claimant can be aged 16 or over.
b) 30 hours for workers with no children and no disability. The claimant has to be aged 25 or over.
- The basic element of the tax credit is £29.20 per week.
- The couple or lone parent element is £28.80 per week.
- A 30 hour element of £11.90 per week is payable where the claimant or one of the claimants works at least 30 hours a week (couples with children may aggregate their hours for this purpose).
- A disabled worker element of £39.15 per week or more is available where the claimant, or his or her partner, has a disability.
- There is 50-plus element and a childcare element
- For employees, payment will normally be made by their employer with their wages (except the childcare element which is paid direct to the main carer). For the self-employed, payment is made directly by the Inland Revenue.
2.3 CALCULATING THE CREDITS
It is necessary first to total the various elements available to arrive at the maximum available amount of tax credits before any reduction on account of income. Different elements can be reduced at different income levels.