Credit where credit is due

Children's Tax Credit is expected to be worth £10 a week off tax bills for some

By Paul Lewis from BBC Radio 4's Money Box programme.

The government has started advertising to encourage parents to "be prepared" to claim the new Children's Tax Credit.

In principle Children's Tax Credit is a simple benefit - it is worth £442 a year and goes to a parent with a child under 16 living at home.

Only one credit is given, however many children there are in a family, and it normally goes to the parent with the higher income.

But the details of the scheme are turning out to be an accountant's dream - and a taxpayer's nightmare.

And more than a million people who could be eligible still have not filled in the form to claim it.

First there is a cohabitation rule - the first ever in a tax allowance.

The person claiming the credit must declare if they are living as a couple with another person of the opposite sex, whether they are married or not.

Gordon Brown: set to boost the credit in the Budget

The person with the higher income will normally get the credit - the partner with the lower income can get the credit, but only if both partners agree to that.

If the person with the lower income claims it without the agreement of the other partner, then the credit is split between them.

Mathematical maze

The cohabitation rule is needed because the credit is means-tested.

The Children's Tax Credit is only paid in full to someone who does not pay higher rate tax.

This year, that starts on an annual income exceeding £32,785.

If your income is higher than that, then the £442 credit is reduced at the rate of £1 for each £15 of income above the limit for higher rate tax.

On this year's rates, that would mean the allowance would disappear as income reached £39,415.

But both the credit and the limit for higher rate tax are expected to rise in the Budget.

So by April, when the credit begins, it will probably be withdrawn completely from anyone whose income is around £41,000.

Where one partner pays higher rate tax then the other partner cannot claim the credit at all, the partner who pays higher rate tax has to do so and face the means test.

So if either partner pays higher rate tax, the Children's Tax Credit is reduced. And if either has an income above £41,000 then the credit will not be paid at all.

So a couple with an income of £65,000 split evenly between them could get the credit in full but, if only one partner worked, they would lose the credit completely as their income reached around £41,000.

Single-parent complications

These rules have serious implications for a single mother who decides to live with a new partner.

First, she has to inform the Inland Revenue of a change in circumstances - failure to do so could result in a fine of up to £800.

If her new partner has a higher income than her, then he would normally get the credit for the rest of the tax year. Even if she insisted, he could keep half the credit without her consent.

So an unrelated man who was not supporting the child could get half or all the tax credit instead of the child's natural mother.

And if he pays higher rate tax, the situation is even worse. He has to claim the credit and, if his income is higher than around £41,000, then the credit stops at once.

To complicate matters further, the government intends to abolish child benefit and combine it with the Children's Tax Credit to create what it calls an integrated child credit probably in 2003/04.

The chancellor of the Exchequer, Gordon Brown, is widely expected to increase the credit in his Budget, probably to £520 - a nice round £10 a week.

That will be paid as a straight cut in the income tax due - if it is claimed now the tax deducted under PAYE will be reduced.