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Monday, 26 November, 2001, 17:36 GMT
Q&A: What are tax credits?

Tax credits are one of the Chancellor's pet themes. But, beneath the rhetoric, what are tax credits, and how do they affect you?

What are tax credits?

The mere mention of the term may induce boredom, but if you want to keep up with how the government is handing out money and get your stake, then you need to know.

Gordon Brown is a "social" chancellor and wants to change society through the tax system.

On the one hand he wants to target the UK's most disadvantaged, for example, single parents and working mothers. At the same time, he wants to "make work pay".

By using the tax system - the gauge of people's incomes - he can target the most needy through means testing.

Tax credits are the product of this integration.

Did he invent them?

While they have been criticised, they are not a fly-by-night project. The chancellor remains firmly committed, despite criticism that they are too complex and bureaucratic.

Tax credits, however, were not invented by the chancellor.

Tax credits have been used as a way of administering benefits for children in Canada and Australia for a number of years.

In Canada they have been around for a quarter of a century.

What can I get?

There are new tax credits on the horizon - a pension credit, integrated children's tax credit, and employment tax credit, will all be introduced in 2003.

Further details are expected to be announced about these credits in the pre-Budget report.

In the meantime, there are three main schemes in operation which could affect you - the working families' tax credit, children's tax credit and disabled person's tax credit.

What is the working families' tax credit?

Working families' tax credit was introduced in October 1999 and is given to families with dependent children on low-to-middle incomes.

To qualify, one parent has to work 16 or more hours a week and each household must have less than 8,000 in savings.

From April 2001, the credit was worth 54 a week plus 26 to 26.75 a week for each child.

There is an additional payment of 11.45, when one adult works 30 hours a week or more and couples with disabled children get additional allowances.

Couples can also get help with childcare - up to 70% of eligible costs up to maximum costs of 135 for one child and 200 for two or more children.

The WFTC award is calculated by adding these components - the credits - together. If the family income (after tax and National Insurance contributions) is above 92.90 per week, this is reduced by 55p for each 1 above 92.90.

What is the children's tax credit?

The children's tax credit started in April 2001.

It replaced a universal benefit called the married couples' allowance

Some couples do not qualify for the new scheme, however.

If you do qualify, it is worth 520 a year or 10 a week per household.

The amount you get is gradually phased out when any partner is a higher rate tax payer - 33,935 - at the rate of 1 for every 15 earned above this threshold.

This means that if each partner earns 30,000 each and have a joint income of 60,000, they would qualify for the full tax credit.

However, it means that a single income household on 45,000, for example, will receive no credit.

This anomaly has been heavily criticised.

What is the disabled persons' tax credit?

The disabled persons' tax credit replaced the disability working allowance (DWA).

It works along the same lines as the working families' tax credit, except claimants gets an "enhanced disability tax credit" of 11.05 for single applicants with no dependent children and 16 for couples and lone parents.

While you must work 16 hours or more each week, you do not need children and you can have up to 16,000 savings to qualify.

All the constituent parts are added up and if the income of a couple or lone parent, after tax and national insurance contributions, is above 92.90 per week, this is reduced by 55p for each 1 above 92.90.

For single people the threshold is 72.25.

How do I get them?

One of the major problems with tax credits is that they are complicated to work out.

Calculating whether you could qualify maybe easy for the Treasury's mandarins but for most people it's double Dutch.

Thankfully, the Inland Revenue, which administers the schemes, has now produced a simple online calculator (see link) for working families' tax credit.

Alternatively, the revenue has helplines for each different type of tax credit.

You need to obtain a form from the revenue, complete it and then the revenue will work out if you are eligible.

Contact numbers:

Disabled persons' tax credit: Helpline on 0845 605 5858 or textphone 0845 608 8844.

Working families' tax credit: 0845 609 5000 or textphone 0845 606 6668.

Children's tax credit Helpline 0845 300 1036.

Does your employer sort them out?

If you are paid through your company's payroll under pay as you earn (PAYE), you will be paid within your pay packet.

If you are self employed, payment is made directly to you.

Couples may choose which partner receives the credit. If the applicant does not have an earned income, payment is made directly.

Employers can ring the employer's helpline 08457 143 143 with queries about paying tax credits.

See also:

20 Jul 01 | Business
27 Feb 01 | UK Politics
05 Feb 01 | UK Politics
09 Mar 01 | Business
07 Mar 01 | Budget 2001
07 Mar 01 | Budget 2001
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