Working families tax credit

In an earlier briefing on proposals for a working families tax credit (WFTC), CPAG welcomed the increased generosity of the new scheme, but expressed concerns that it failed to assist those on the lowest incomes leaving many families unable to achieve a ‘low cost but acceptable budget’. Measures announced in the Budget on 9th March 1999, in particular the £2.50 increase in level of the adult credit for WFTC and a significant increase of £4.70 for the WFTC credit and personal allowance in other means-tested benefits for children under 11, have improved this. Further changes, such as the small increases in child benefit from April 2000, build on it.

CPAG welcomes the priority the Government has placed on ‘tackling the scourge of child poverty.’ and the commitment it has shown in the budget to carrying through this aim. As proposals now stand WFTC will enable even more families with a wage earner to afford a ‘low cost but acceptable budget’. We also welcome indications that the Government is looking at a mortgage benefit to assist low paid home owners. 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 which is unfit for human habitation. The mean cost of rendering such accommodation fit is £5,500. A mortgage benefit would help some of these owners.

WFTC brings more resources to families in low paid work. It reduces the number of families facing very high marginal rates of taxation (MTR) (its taper is lower and its increased generosity reduces the number of families also needing to claim housing benefit.) The knock-on effect is, however, to increase the number of families facing a relatively high MTR ( 60%).

The Government’s long term aim is to ‘bring together the different strands of support for children’ with the aim of creating ‘an integrated and seamless system of child financial support paid to the mother building on the foundation of universal child benefit.’ CPAG welcomes this further commitment to the principles of child benefit, and hopes it is an indication of an intention to reduce means-testing in the long term. Furthermore, we should not lose sight of the fact that WFTC is needed because wages are low.

Because we believe that WFTC brings welcome resources to families CPAG’s concern is that the system should work as well as possible and be taken up as widely as possible.

Who gains from WFTC?

In December 1998, the Government estimated the overall average gain per family including childcare costs as £17.20 a week. This will have increased following the Budget announcements.

As earnings rise, the gain from the introduction of WFTC relative to FC rises and then falls again. A couple with two children under 11 see their incomes increase with WFTC as follows:

If the family are also entitled to housing benefit (HB) or council tax benefit, the gain from WFTC relative to FC is reduced due to the effect of an overlapping system of tapers. For a couple with two children under 11, as in our examples, on net earnings of £100, the overall gain is £13.10 when the impact on HB is taken into account. Although this is significantly less than the £19.95 gain from WFTC alone, it is still a welcome increase.

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 Budget, it was estimated that around 19% of WFTC recipients would also get HB.

Can all WFTC recipients meet a low cost but acceptable budget?

Research by the Family Budget Unit, found that a couple with two children under 11 and one full-time earner require £230 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.’

The income of a couple with two children under 11 claiming WFTC will be:

A couple with two children under 11, will have sufficient income to meet a low cost but acceptable budget if they have net earned income of £125 pw. The minimum will raise the average gross earnings of the main earner in a FC recipient family from £121 to £129. 58% will earn below £120 pw gross.

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. The number of such families should be included in the Government’s recently announced Poverty Audit.

Acheson report

The report of Sir Donald Acheson’s ‘Independent Inquiry into Inequalities in Health’ considered the March 1998 Budget (with above inflation increases in benefit rates for younger children and tax credits) was an ‘important start’ which would ‘go some way to narrowing the discrepancies between benefit levels and the needs of families’. We are pleased to see that the government has consolidated and improved these increases in the 1999 Budget. The report acknowledged that substantial improvement would require sustained action.

We understand the Government is to consider the recommendations of the Acheson Report as a whole in the development of a new health strategy and is to produce a White Paper early this year. CPAG looks forward to the White Paper. Two important ways of assisting families with ‘items and services necessary for good health’ would be to:

• transfer the ‘passported’ benefits currently available to family credit recipients to recipients of WFTC;
• extend entitlement to free school meals to children of WFTC recipients.

Passported benefits

Family credit claimants get free prescriptions, dental treatment, glasses and sight tests. They are also entitled to help with maternity and funeral expenses from the social fund. The Government has said that ‘those who are presently entitled to passported benefits because they receive Family Credit will continue to be entitled to such benefits when the WFTC is introduced.’ It is not clear whether entitlement would continue beyond the end of the award current on 5 October 1999. In evidence to the Select Committee on 28 October 1998, the Inland Revenue were unable to say whether these passported benefits would be transferred to WFTC and DPTC. CPAG urges the Government to do so. The increased generosity of tax credits and other measures announced in the 1998 and 1999 budgets will otherwise be undermined as the charges will have to be met from other income. Passporting will help ensure that families in low paid work retain access to vital medical treatment and services.

Free school meals

Children whose parents are in receipt of income support/income-based jobseekers allowance are entitled to free school meals. Children whose parents received family income supplement (the precursor of family credit) were also entitled. When family credit replaced family supplement, entitlement to free school meals was withdrawn for working families.

The Government has recognised the importance of school meals:

‘On its own a nutritionally-balanced school lunch cannot compensate for an otherwise poorly balanced diet, but it can make an important contribution to healthy eating and restoring balance to the diet.’

CPAG urges the Government to consider extending free school meal entitlement to children of WFTC recipients. In the short term, we would urge it as a minimum to adopt the recommendation of the Social Security Committee and ‘extend free school meals to ‘families who are awarded WFTC or DPTC who have been in receipt of income support or jobseeker’s allowance in the period immediately preceding the award.’ The cost of extending free school meals to all children of WFTC recipients is £410 million (£210 for children under 11).

30% 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. Extending free school meals is an investment in our children’s future.

The interaction with child support

CPAG welcomes the fact that working families tax credit recipients are not to be required to co-operate with the child support agency. This will reinforce the link between tax credits and work. We further welcome the fact that child support maintenance will be disregarded as income when calculating WFTC. This will allow child support to be used for the benefit of the children as intended.

Payment through the pay packet

Employers are to take over payment of tax credits from April 2000. In contrast, family credit is paid by the DSS with a number of distinct advantages:

• Payment can be made to the main carer of children, as is the case with family credit.
• Payment is secure regardless of such factors as a dispute with an employer or a change in job.

Payment to the main carer

A reason for paying through the pay packet is to ‘reinforce the distinction between the rewards of work and remaining on welfare.’ In CPAG’s view, a more important aim is to ensure that help is best directed to meet the needs of the whole family. Recent research shows that income paid directly to mothers is more likely to be spent in ways that benefit children or the family as a whole.

‘Men prioritised personal spending money more highly than did women, and were less able than women to give specific instances of ‘going without’. Both men and women saw responsibility for ensuring that children’s material needs were met as the women’s domain.’

Just over 50% of family credit recipients are couples. In around three quarters of cases, the main earner is a man. CPAG believes that the presumption should be that payment goes to the main carer of children with an option having to be made by both partners for payment to the main earner. The Government has made it clear that while there will not be such a presumption, there will be a choice as to who receives payment. CPAG believes that to make this choice as effective as possible i) the notification of the award should be sent to both partners, ii) the application form should be explicit about the effect of who makes the claim for benefit and iii) there should be clear rules for arbitrating disputes with an over-riding aim of ensuring that the tax credit benefits children in the family.

Secure and regular payment

A further advantage of payment direct from the Government agency rather than through the pay packet is in providing security of income uninterrupted by changes in work patterns or a change in employers. The challenge for the Inland Revenue is to ensure that payment remains prompt and secure.

In debate the government has sought to give reassurances that mechanisms will be put in place to ensure that when an employer ceases to pay WFTC to an employee 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 that ‘(i)f an employer refuses to co-operate, the employee can tell the Inland Revenue and it will pursue the matter’. Regulations state that an employer must issue a certificate of payment to an employee within an unspecified number of days of ceasing to pay him/her. 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 WFTC represents. Clear arrangements must be made if tax credits are not to be disadvantageous to family credit in this respect.

Initial payments

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 announcement in the Budget that lone-parents will receive an allowance of income support for their first two weeks in work. We think this should be extended to other groups who may have been on benefit long term.

For more information, contact Fiona Frobisher on 020 7837 7979.