A credit to the family

District judge John Mitchell investigates child and working tax credits which will make a big impact on family and housing practitioners

The new system for family support - child tax credit and working tax credit - starts on 7 April 2003.

The government has claimed that this marks 'the biggest revolution in the tax and benefits system since Beveridge' and that six million families will be eligible for support.

'Nine out of ten families with children will benefit from the new child tax credit so it is vital that everyone is aware of the changes and knows how to claim their entitlement.'

Under the Tax Credits Act 2002, child tax credit (CTC) replaces the child-based elements in income support, job seeker's allowance, working family tax credit, disabled person's tax credit and the current children's tax credit.

However, child benefit remains unchanged.

Eligibility is extended to some who are currently excluded such as students and student nurses.

Working tax credit (WTC) which replaces working family tax credit will now extend to those in work without children and also provide support with the cost of child care.

Although responsibility for payment has been transferred to the Inland Revenue, entitlement and payment are independent of the tax system.

Credits are not tax allowances.

Although WTC will usually be paid by the recipient's employer, CTC and the child care element of WTC will be paid direct to the bank account of the main carer of the child.

Studies have suggested that women are more likely to control income which they receive directly rather than through their partner's wages and are more likely to spend the money on the family.

Who can claim?

CTC is available to those who are responsible for at least one child or a 'qualifying young person' (QYP), defined in the Child Tax Credit Regulations 2002 (CTCR) SI 02/2007 as someone who is younger than 19 and receiving full-time education (but not advanced education, for example, at university or by virtue of employment) or younger than 18 and registered for work or training, having ceased to be in full-time education for a consecutive period of 20 weeks.

WTC is for people who are either 16 or older, in paid employment (including self-employment) for 16 hours a week and who are responsible for at least one child or are disabled or who are aged 25 or older and usually working for at least 30 hours a week.

A person is treated as responsible for a child or QYP who is normally living with him (the 'normally living with' test).

Regulation 3 of the CTCR states that a child or QYP normally living with two or more persons in different households has to be treated as the responsibility of only the one who has the main responsibility for him ('the main responsibility' test).

Those with whom the child is living may jointly elect as to which of them has main responsibility.

In default, the Inland Revenue determines the position.

This rule has obvious implications for children subject to a shared residence order or an informal shared residence agreement.

Making the application

A single claim covering both CTC and WTC has to be made annually for each household even if working family tax credit is currently being paid.

Couples must make a joint application.

The application can be made by post - the Inland Revenue is currently sending application forms to those who it thinks may qualify - or over the Internet (see the Inland Revenue Web site at: www.

taxcredits.inlandrevenue.gov.uk).

The amount of tax credit will be based on the claimants' income for the tax year (for 2003/4 this will be taken to be the income for 2002/3) and awards will last for 12 months.

They may be adjusted during the year to take account of income changes but in order to provide greater support than previously, rises of up to 2,500 in the current tax year will be ignored.

All falls in income will be taken into account.

How much?

The amount of award is determined by adding the various elements of CTC and WTC for which the claimants are eligible and reducing the total by tapering according to the level of annual household income.

CTC rates are 1,445 for each child or QYP, an additional 2,115 for a disabled child, 865 for a severely disabled child, 545 for the family and 545 for a baby younger than one year.

WTC includes an element for child care for any child up to 1 September following his fifteenth birthday.

The amount is the greater of 70% of the costs incurred in using a registered child minder, nursery or play scheme, an out-of-hours school club or a childcare scheme run by an approved provider and 135 a week for one child or 200 for two or more children.

Income is calculated by adding all gross earned and unearned income, including benefits in kind from employers and state benefits, but excluding child benefit, working families tax credit, disabled person's tax credit, disability living allowance, attendance allowance, housing or council tax benefit and student loans.

Maintenance from a former partner and children's income are ignored so child support payments are not taken into account.

Tapering starts at 5,060 for WTC and for CTC, the greater of 13,230 or the amount required to taper WTC to nil.

For the CTC family element the threshold is the greater of 50,000 or the amount required to taper all other tax credits entitlements to nil.

WTC and CTC are reduced by 37 pence and the CTC family element by 6.67 pence for every 1 of income over the threshold.

The Inland Revenue Web site contains a credit calculator.

By way of illustration, James and Sarah have two children.

James works more than 30 hours a week and Sarah looks after the children.

They have a maximum entitlement to WTC of 3,645 and for CTC of 3,435 (family element 545 and two child elements of 1,445 each).

Their income of 22,000 a year exceeds the first threshold by 16,940 (22,000 - 5,060) so their maximum tax credit is adjusted by 6,265 (16,940 x 37%) giving a final award of 815 (7,080 - 6,265).

According to government figures, families with two children will receive support of 5,255 if their annual income is 10,000, 3,410 if 15,000 and 545 if their income is 25,000 or more.

Entitlement to CTC for all families will not be totally exhausted until income reaches 58,000 or 66,000 where at least one child is less than one year old.

Whether the take-up by eligible claimants exceeds that for working family tax credit, which is reckoned to be about 70%, remains to be seen.

District Judge Mitchell sits at Bow County Court