Tax credits fact sheet
January 2003

From April 2003 a new tax credits scheme comes into force that will radically alter the current social security and tax credits systems. The new scheme has been heralded by the Government as a means to tackle child poverty, poor work incentives and persistent poverty among working people. The two new tax credits being introduced are:

Child tax credit
Child tax credit (CTC) is a means-tested credit for low- and middle-income families with children who are in or out of work that brings together existing means-tested support for children. It will be paid on top of child benefit.

Working tax credit
Working tax credit (WTC) is a means-tested credit for working adults that brings together the adult elements of working families' tax credit and disabled person's tax credit.

The new credits will therefore replace:

• The amounts for children within income support and income-based jobseeker's allowance from 6 April 2004.
  
• Children's tax credit.
  
• Working families' tax credit and disabled person's tax credit.
  
• Child dependency increases currently available within incapacity benefit, severe disablement allowance, retirement pension, invalid care allowance, widowed mother's allowance and widowed parent's allowance. Although there will be some transitional protection for existing claimants.
  
• Employment credit currently available under New Deal 50+.

Eligibility
For Child tax credit claimants must be:

• Over 16 years old and
  
• A couple or lone parent with responsibility for a child(ren) under 16 or under 19 if in relevant education.
  

For Working tax credit claimants must be:

• Over 16 years old and either
  
• Working 16 hours or more per week and responsible for a child or
  
• Working 16 hours or more per week and have a disability or
  
• Working 30 hours or more per week and over 25 years old or
  
• Over 50 years old and working 16 hours or more per week, began work in the last 3 months and previously in receipt of income support or JSA or incapacity benefit or severe disablement allowance for at least 6 months before beginning work.

Claims and awards
Claims will be decided on an annual basis with awards running from April 6th - April 5th as per the tax year cycle, using the annual gross (before tax) income of the previous year (with exceptions). So if a claim is made in July it will run up to the following April. However, awards for 2003/2004 will be based upon the income of 2001/02.

The exceptions are where the current year income is less than previous year - current year income will be used and where current year income exceeds previous year income by more than £2500 – current year income minus £2500 will be used.

At the end of the tax year, the award will be reconciled against actual income for the previous year. This could result in an overpayment to be repaid or an underpayment where extra credit is due.

Income rises and falls during the year of the award:

There is no obligation to notify changes in income during the year, only at the end. However, this could result in an over or under-payment. If you choose to notify changes in income during the award then the assessment becomes based upon a forecast of current year's income.

Annual income rises during an award of up to £2500 do not affect the level of the current award.

Payments
Payments of tax credits are made via the employer through the wage packet except for:

• Child tax credit and the childcare element of working tax credit which will be paid to the main carer.
  
• Self-employed people who will be paid direct by the Inland Revenue.

How to claim

• By the claim form available at Inland Revenue Enquiry Centres or the Inland Revenue helpline 0845 300 3900
  
• On-line via the Inland Revenue website www.inlandrevenue.gov.uk/taxcredits/
  
• At jobcentre plus offices if moving off benefits into work

A renewal form will be sent to claimants towards the end of the tax year.

Entitlement examples

• A lone parent working 25 hours a week with 1 child aged 7 and eligible childcare costs of £80 per week and a gross annual income of £9000. The award for the year would be £6477.20 or £124.22 per week.
• A single person aged 27 working 30 hours a week and a gross annual income of £8000. The award for the year would be £1057.20 or £20.28 per week.

Also of interest
New CPAG tax credits training course: An introduction to the child tax credit and working tax credit

A guide to the new tax credits
A 4-page A4 summary guide to the new tax credits, including:

• Introduction
• What is working tax credit?
  
• What is child tax credit?
  
• How are tax credits made up?
  
• What is the income threshold?
  
• Take-up issues
  
• How are claims dealt with?
  
• How are payments made?
  
• Changes in circumstances – a new culture
  
• Unfinished business

Download a 31KB pdf copy of this 4-page A4 summary guide.