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 Wednesday, 3 April, 2002, 12:23 GMT 13:23 UK
Help for the working poor

The Budget is expected to confirm some major changes in the tax and benefit system that will affect millions of families.

Government critics say the plans will lead to confusion among those who are eligible, and lots more means-testing.

But the Treasury hopes the new system will boost the incentive for people to take jobs rather than remain on benefits.

And it hopes the simplified system of benefits for children will make available more money to reduce child poverty.

The changes are yet to be officially costed, but the Institute for Fiscal Studies estimates the price tag could be 3.8bn.

New tax credits

The two new tax credits will have their rates set in the budget.

The child tax credit combines all the existing benefits and credits for children, except universal child benefit.

The working tax credit introduces the principle of in-work credits for those without children, following on from the working families tax credit which was introduced in October 1999.

Tax credits can be understood as benefits delivered through the tax system.

Rather than having separate benefits which people claim individually, the government prefers instead to use the tax system to 'credit back' money.

Employers have to administer the benefits through changes to individuals' tax codes.

Child tax credit

The new child tax credit will be up and running in 2003, and around 5.7m families are expected to be eligible.

The credit will integrate the child element of the working families' tax credit, child allowances of income support and children's tax credit.

As now, all families with children under 16 will also receive universal child benefit.

The idea is to make the transition from benefits to work easier for those who move between them.

And it also could be another way of redistributing money from richer to poorer families - depending on the rate set.

The Institute for Fiscal Studies estimates that one million families will lose from the changes and 3.6 million will gain.

The losers will be mainly high-income two earner households who currently qualify for the child tax credit - which itself was only introduced in April 2001 (as a replacement for the married couples allowance).

Working tax credit

The working tax credit (WTC) will provide support for single people and couples regardless of whether they have children.

It aims to extend the principles of tax credits to low paid workers without children - the first time credits have been used in this way.

Experts predict that about one million couples and single people will receive the new working tax credit.

Many of those who will benefit, however, could be young people who live in households that are not considered poor.

Take-up issues

Critics charge that many people eligible for these benefits will be put off by their complexity and the fact that they are means-tested. As a result, take-up rates could be low.

For example, only six out of 10 people eligible for the working families' tax credit receive it.

Another worry is that people's eligibility for these credits will depend on a single assessment of annual income.

But what will happen when a family's income radically changes?

Might people be asked to pay money back?

And how quickly could they receive it if they have no other source of income?

Fraud fears

The system also leaves the door open to fraud.

It appears that the credit will be set following an 'estimate' of annual income - so if people under-estimate their income they would receive a bigger credit.

Checks by the Inland Revenue will be required but that will increase bureaucracy and make the schemes unpopular.

Unemployment trap

The government's overall strategy is to raise the incomes of low paid workers - through taxes and benefits and the minimum wage - to reduce the incentive to stay on the dole.

But it will be hard for ministers not to simply move the unemployment trap further up the income scale.

People may find work as a result of incentives provided by the credits.

But there then may be little reason to work longer hours, or seek a better paid job, if the tax credit is then withdrawn.

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See also:

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