Who is entitled to WFTC?

Most of the rules for entitlement to working families tax credit are broadly the same as for family credit (FC). Generally speaking, a person qualifies if s/he:

• (or her/his partner) normally work full-time (16 hours a week or more);
• is responsible for at least one dependent child;
• is on a low income;
• does not have capital of more than £8,000.

Around one and a half million families are expected to be entitled to WFTC, compared with a FC caseload of around 800,000.

As earned income rises the maximum credit is reduced by £0.55 for each £1
above the ‘threshold’ figure of £90 a week. As with FC, WFTC is payable at a set rate for 26 weeks.

A ‘childcare tax credit’ may be added to the maximum for lone parents and some couples (where both work or one cannot work). This covers ‘eligible’ childcare costs paid for children up to the age of 15, or 16 if a child is disabled. 70% of childcare costs up to £100 a week for one child or £150 a week for two or more children are allowed (ie. up to £70 or £105). ‘Eligible’ childcare includes registered childcare and after school clubs provided by schools or local authorities. From April 2000, a new scheme will allow providers for older children to be approved.

From October 2000, WFTC will also contain a ‘disabled child’s allowance’ as is currently the case with disability working allowance (worth £21.90 pw in 1999/2000).

Tax credits are administered by the Inland Revenue, with claim forms available from both Inland Revenue Tax Enquiry Centres and Benefits Agency offices. Tax offices will accept general enquires about tax credits, although they will need to contact the Tax Credit Centre for detailed answers to queries about specific tax credit awards. There is also an Inland Revenue Tax Credit Office Helpline (01253 500050).

Initially, tax credits will be paid by the Inland Revenue. In most cases, employers will take over payment of tax credits from April 2000.

This is a change to the previous FC system, which presumed that payment went to the mother. In the light of recent research showing that income paid directly to mothers is more likely to be spent in ways that benefit children or the family as a whole, CPAG argued for payment to continue to be made to mothers. In the absence of this, however, we welcome the fact that couples have an open choice of which partner receives payment.

CPAG believes that to make this choice as effective as possible:

• the notification of the award should be sent to both partners;
• the application form should be explicit about the effect of who makes the claim;
• there should be clear rules for arbitrating disputes, with an over-riding aim of ensuring that the tax credit benefits children in the family.

Lone parents who are employees do not have a choice but to receive payment through the pay packet. Self-employed applicants are paid by the Inland Revenue by order book, giro cheque or into a bank account.

The Inland Revenue will notify the employer when to start paying WFTC, giving time for the payroll to be adjusted. The notification refers to tax credits and does not distinguish between WFTC and DPTC, nor does it distinguish the various elements of the award. This will help preserve the applicant’s confidentiality.

Tax credits will be paid at the same intervals as pay. The employer will be given a ‘daily rate’ to enable the amount of tax credit to be included in each wage packet to be calculated.

The employee will be informed of how and when payments will be made and the total amount to be paid by the employer. Arrangements can be made for initial payments to be made by the Inland Revenue until the employer can take over. The Inland Revenue states that employers will generally be expected to start paying within 14 days if an employee is paid weekly and 42 days in all other cases.

When an employee changes job or leaves employment, the employer will have to provide her/him with a Certificate of Payment, showing the details of tax credits already paid. The Inland Revenue will then pay the tax credits directly to the employee until arrangements can be made for a new employer to start paying.

Employers will be able to set off the amount of tax credits they pay against their PAYE and NIC liabilities. Employers whose liabilities are too small for them to cover the WFTC and DPTC due will be able to apply to the Inland Revenue for funding. They must do this in time for the transfer to be made. The Inland Revenue estimates that it will be able to supply the funding in time if employers apply at least nine days before the pay day if funds can be transferred by ACT, or 21 days if a Payable Order needs to be sent.

One advantage of payment direct from a government agency rather than through the pay packet is that it provides a secure income, uninterrupted by changes in work patterns or employers. The challenge for the Inland Revenue will be to ensure that payment remains prompt and secure.

The Government has provided reassurance that mechanisms will be put in place to ensure that when an employer ceases to pay WFTC the Inland Revenue will take over. A code of practice is being developed to guide this. When situations change ‘the Inland Revenue must be informed’ and ‘if an employer refuses to co-operate, the employee can tell the Inland Revenue and it will pursue the matter’. An employer must issue a Certificate of Payment to an employee within an certain number of days of ceasing to pay her/him. The Inland Revenue will then be obliged to take over payment. However, there is no specific time limit on the Inland Revenue to fulfil its obligations. Families in low-paid work will rely on the extra income provided by WFTC and clear arrangements must be made if tax credits are not to be disadvantageous compared with FC in this respect.

The calculation of tax credits, including the tapers, threshold and maximum amounts, is more generous than for FC. On average, families will be £24 a week (£1,200 a year) better off on WFTC compared with FC. As earnings rise, the gain from the introduction of WFTC relative to FC rises and then falls again.

If the family is also entitled to housing benefit (HB) or council tax benefit (CTB), the gain from WFTC relative to FC is reduced because of the effect of an overlapping system of tapers. On net earnings of £100, the gain is reduced from £19.95 a week to £13.10 a week when the impact on HB is taken into account. Families not entitled to HB at all (for example, because their income is too high or rent too low) will gain from the full increase. Prior to the March 1999 Budget, it was estimated that around 19 per cent of WFTC recipients would also get HB.

Research by the Family Budget Unit found that a couple with two children under 11 and one full-time earner require £234.60 a week to meet a ‘low cost but acceptable’ living standard. This is the ‘income threshold below which good health, social integration, and satisfactory standards of child development are at risk. It is a modern minimum, sustainable indefinitely which takes account of psychological, social and physical needs.’

A couple with two children under 11 will, therefore, have sufficient income to meet a ‘low cost but acceptable’ budget if they have net earnings of over £125 a week.

The minimum wage raised the average gross earnings of the main earner in a FC recipient family to £129. Fifty-eight per cent of WFTC recipients will earn below £120 gross a week.

The combined effect of the introduction of the minimum wage, the improvements to tax credits and other measures announced in the Budget will, therefore, increase the number of families with sufficient income to meet a low cost but acceptable budget. A significant number of families will, however, still be below this level. Although the Family Budget Unit’s report provides a useful contribution to the ‘how much is enough?’ debate, CPAG would like to see the Government establish a minimum income standard -- setting a level of income necessary to respect human dignity and combat social exclusion. The number of families with incomes below this level should be included in the Government’s Poverty Audit. As Sir Donald Acheson pointed out, sustained action is required to narrow the discrepancies between benefit levels and the needs of families.

CPAG has long argued that the difficult transition from secure weekly benefits to insecure monthly wages is a major disincentive to taking up work.

We therefore welcome the fact that lone parents will continue to receive an allowance of income support/income-based jobseekers allowance for their first two weeks in work where they have been on the benefit for at least six months. Payment will be automatic.

This complements the provision of back-to-work benefits, which include extended payments of HB and CTB, the back-to-work bonus and the child support bonus.

WFTC recipients are not required to co-operate with the Child Support Agency and payments of child support maintenance are disregarded as income when calculating WFTC. These are extremely welcome measures that will allow child support to be used, as intended, for the benefit of the children.

The difficult questions regarding the interaction of WFTC with HB have still to be resolved. We may see some answers in the forthcoming housing Green Paper, expected in the Autumn. There are welcome indications that the Government is looking at a mortgage benefit to assist low-paid homeowners. Prior to the introduction of tax credits, the absence of such a benefit meant there were an estimated two and a half million people in households with net incomes below income support levels. Some 835,000 owner-occupiers live in accommodation that is unfit for human habitation. The average cost of rendering such accommodation fit is £5,500. A mortgage benefit would help some of these people.

Families with a net income of under £11,250 a year will be entitled to free health benefits, such as free prescriptions and free dental treatment, broadly replicating the previous system under FC. It is expected that one million of the 1.4 million families on tax credits will be covered. It is also expected that the same system will apply to other passported help, such as legal aid and energy efficiency grants. All tax credit recipients will be entitled to social fund maternity and funeral expenses payments.

Children whose parents are in receipt of income support/income-based jobseeker’s allowance are entitled to free school meals. Children whose parents received family income supplement (FIS), the precursor of FC, were also entitled. FC claimants are not. Some notional compensation was included in FC rates although at such low levels of income, there was no guarantee that this would be put towards school meals rather than basic essentials.

The Government has recognised that school meals can ‘make an important contribution to healthy eating and restoring balance to the diet.’ Thirty per cent of children do not go home to a cooked meal. Even mild under-nutrition affects concentration and cognition.Improvements in the nutrition of school children should reduce the risk of chronic degenerative and other diseases in adult life.

CPAG urges the Government to consider extending free school meal entitlement to children of WFTC recipients. As a minimum, free school meals should be extended for the first award of WFTC or DPTC following a period on income support/income-based jobseekers allowance. Extending free school meals is an investment in our children’s future.

For more information, please contact Fiona Frobisher,
Parliamentary Officer on 020 7837 7979 x 237 or email ffrobisher@cpag.demon.co.uk