How to gain credit from a taxing issue

Katie Paxton-Doggett runs the rule over the Tax Credits Act 2002 and who will benefit

Two new tax credits are being introduced from April 2003 under the Tax Credits Act 2002.

The government claims that nine out of ten families with children will qualify.

Many of those able to claim are middle-income families who would not normally expect to receive benefits from the state, so solicitors advising private clients need to know what is available.

Practitioners could also find that they qualify.

Although they are called tax credits, the new tax credits are payable like a benefit rather than as a tax reduction through the PAYE code or tax calculation.

They are both administered by the Inland Revenue.

Families with children

Child tax credit is governed by one main set of regulations, The Child Tax Credit Regulations 2002.

It is available to people who are responsible for:

- At least one dependent child younger than 16 years, and;

- At least one dependent young person younger than 19 years of age and in full time non-advanced education or training.

Child tax credit is paid to the carer of the children and not necessarily the breadwinner.

There is a single system for claimants which provides continuity as parents move into work.

Child tax credit is paid in addition to child benefit payments.

Where a child 'normally lives with' a person, that individual may make the claim.

Married or unmarried heterosexual couples must make a joint claim.

Same-sex couples must make individual claims.

However, in the event of shared care, only the person satisfying the 'main responsibility test' will qualify.

The Revenue will decide in the absence of agreement.

The maximum rate of entitlement is the aggregate of the family element plus the individual element for each qualifying child.

Consider the following rates: family element, 545; family element if child younger than one year, 1,090; individual element, 1,445; individual element disabled, 3,600; and individual element severely disabled, 4,465.

Back into work

Working tax credit is a means-tested payment to top up the earnings of those in work.

It is governed by the Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002 and the Working Tax Credit (Payment by Employers) Regulations 2002.

It is available to:

- People with children and/or a disability who work at least 16 hours a week;

- People aged older than 25 years and working at least 30 hours a week, and;

- Those aged 50 or older who are working at least 16 hours a week and are returning to the labour market after a period on benefits.

Again, total entitlement is the total of the basic element and any additional elements to which the claimant is entitled: basic element, 1,525; lone parent element, 1,500; couple's element, 1,500; 30-hour element, 620; disabled worker element, 2,040; severe disability element, 865; 50-plus element, 1,045 for those who work 16 or more hours a week, and 1,565 for 30 or more hours.

To encourage people to take up full-time employment, there is a 30-hour element for people who work at least 30 hours a week.

Couples with at least one child can claim if they work 30 hours a week between them, though they will still need to meet the 16 hour a week requirement to qualify.

The childcare element is intended to help with the cost of childcare, and enable more parents to get back into paid work.

It will meet up to 70% of the cost of eligible childcare (subject to an overall maximum of 135 a week for one child and 200 a week for two or more children).

Childcare costs that will qualify include payments to registered childminders, nurseries, play schemes or out-of-school clubs, and schools exempt from registration.

It is available where a lone parent or both partners in a couple work for at least 16 hours, or where one partner is working and the other is disabled.

Calculation

Those with income below the first threshold will be paid the full amount of tax credits available for their circumstances.

Those who qualify for income support or income-based jobseekers' allowance will be entitled to the maximum child tax credit without an additional income test.

Those with incomes over the first threshold will have their maximum tax credit award reduced by 37p for every 1.

For those entitled to child tax credit only, the first threshold is 13,230; the working tax credit is 5,060.

When annual income exceeds 50,000, claimants will only be entitled to the family element of child tax credit and this will be reduced by 1 for every 15 over the 50,000 threshold.

Revenue guidance states that some child tax credit is likely to be paid to families with incomes of up to 58,000 or 66,000 if there is a child under one year of age.

Payment of tax credits

Child tax credit and the childcare element of working tax credit are payable directly to the person who has main responsibility for caring for the child/children.

Working tax credit other than the childcare element will generally be paid by employers to employees with their wages.

The Working Tax Credit (Payment by Employers) Regulations 2002 place the obligation on employers to calculate and pay working tax credit to employees issued by the Revenue.

They also set out how the payment is to be funded by the employer from tax or other deductions from employees' emoluments.

For small employers, funding can be obtained from the Revenue.

Awards are made for a 12-month period, although where there is a change of circumstances during the year, the award can be adjusted from the date of the change.

There is a requirement to notify within three months if there is a change in the make-up of the household - for example, a couple separate, or a lone parent starts to live with somebody - or if there is a change in childcare costs of more than 10 a week.

There is no requirement to notify any other changes during the year, although claimants can do so if they wish.

At the end of the tax year, claimants will be sent a renewal form which requires confirmation of income and circumstances for the year just finished.

Changes in circumstances will be disclosed at the year-end.

Any over or underpayment would be reflected in the next tax credit award.

Claiming

A pack is now available from local tax offices containing one form that can be used to claim both credits.

The form can also be accessed and completed on-line at: www.inlandrevenue.gov.uk/taxcredits

The Web site also guides users through to determine eligibility.

A helpline has been set up, tel: 0845 300 3900.

Claims are based on income from the preceding tax year.

Only income from savings is taken into account rather than the capital.

However, for the first year claims will be based on the 2001-02 year.

There can be little or no backdating of tax credit claims.

There are also expected to be a large number of claimants, estimated to be in the region of six million applications.

Therefore, early claims are advisable and claims can now be made with awards coming into effect from 6 April 2003.

The Revenue has published some useful examples on its Web site showing how tax credits are calculated.

They also feature in the current advertising campaign.

Solicitor Katie Paxton-Doggett is a legal consultant at Legal Network Television