Tax Credits

Tax credits were introduced by the Labour government several years ago in an attempt to lessen the tax burden on families.

It's estimated that nine out of ten families with children are entitled to some form of tax credit, although many families do not bother to claim. There have also been numerous problems with the administration of the tax credit system in recent years. The cost of administrating the system have spiraled and there has been numerous cases of families being overpaid and then suffering hardship when payments were subsequently stopped or clawed back. In fact, it has been estimated that, at one stage, overpayments represented a seventh of all tax credit handouts. The whole debacle has lead to government promises to make the system simpler.

There are two types of tax credit available. They are Working Tax Credit and Child Tax Credit.

Working Tax Credit

Working Tax Credit is a top-up for people who are on a low income and in paid work, whether employed or self-employed. You can be eligible whether you're single, married or living together as if you were married and if you're in paid work for more than 16 hours a week. It's even available to people without children although couples will generally only qualify if they're earning less than about £15,000 a year and singles less than £11,000.

It's applicable to the following:

• People aged 25 or over who usually work for at least 30 hours a week or
• People aged 16 and over and responsible for at least one child or
• People aged 16 or over and disabled

Apart from the basic element available to all who qualify, there are extra elements payable if, for example, you're a single parent, if you or your partner work more than 30 hours a week, if you or your partner have a disability or if you have childcare costs. There's also an extra element for people over 50.

The tax credit is based on your annual income (for couples, your joint income). Initially, it's base on your annual income for the previous year but it can change if your actual income is more than £2,500 more than expected. It'll be paid to whoever is working although if you receive the childcare element of Working Tax Credit, this element will always be paid directly to the person who is mainly responsible for caring for the child or children, alongside payments of Child Tax Credit. If you both work, it will be paid to whichever one of you was nominated to receive Working Tax Credit on the claim form.

You can't receive it if you are not working and the amount you can claim on a weekly basis depends on your gross income.

There may also be other benefits if you're eligible for Working Tax Credit. If your income is below a certain level there is help with health care costs such as free NHS prescriptions, NHS dental treatment and sight tests, vouchers towards the cost of glasses or contact lenses and any children may also be eligible for free school meals.

Child Tax Credit

Child Tax Credit is designed to streamline all the various 'child' elements available in other forms of benefits, such as Income Support and the Jobseeker's Allowance.

Payment is based on overall household income. Families earning up to £58,000 a year can claim the credit and even those on up £66,000 will get help in the first year of a child's birth via the double 'baby rate' of tax credits (worth up to £1,090).

Any Child Tax Credit will be paid direct to the primary carer, usually the mother, in the same way as Child Benefit. So, in the case of a mother who stays at home with the children and a father who goes out to work, the Child Tax Credit will be removed from his salary and paid directly into the mother's bank account.

You can find out how to claim both Working Tax Credit and Child Tax Credit on the Tax Credits website. It's reckoned that as many as 2 million families entitled to make a claim have not done so. Make sure your family isn't one of them!