FOOL'S EYE VIEW
Extra Money For New Babies

By Jane Mack (TMFJane)
April 15, 2002

As Budget Day draws ever closer, and we wait with baited breath to see how we're going to get clobbered for taxes this time, there's a little good news for parents with new babies. Last year the Chancellor announced that he would be doubling the value of the Children's Tax Credit (CTC) in the first year of a child's birth from April 2002.

It may not sound like a lot – it's going up from £10 a week to £20 -- but throughout the year it will now be worth up to £1,040 in the first year and then up to £520 a year afterwards.

The Children's Tax Credit is still a fairly new benefit and you could be forgiven for wondering what it is. After all, we're only just getting to grips with the Working Families Tax Credit, not to mention the extra help now available for childcare. The Children's Tax Credit is something completely different and it seems the Government has done a pretty poor job of alerting families to this new method of getting some free money.

So, let's explain it:

The Children's Tax Credit is a form of tax relief that could put an extra £520 a year into the pockets of low-to-middle-income parents each year (£1,040 in the first year). It's designed to replace the married couple's allowance, which was abolished during a previous budget.

It depends on how much you earn as to whether you qualify, but essentially CTC can be claimed by

• married or unmarried couples
• single parents:
• who have at least one child living with them who is under the age of 16 at the start of next April

The basic annual credit of £520 works on a sliding scale and is reduced at the rate of £1 for every £15 of income taxed at the higher rate. The same applies to the £1,040 number for the first year of the child's birth. In theory, if one of you is a higher rate taxpayer, then the chances of getting much of this extra tax relief are minimal.

You'll realise that this doesn't quite work.

It may seem logical at first glance to offer extra tax relief in this way - after all, if you or your partner falls into the 40% bracket then you must be rich, right? Wrong! In typical bureaucratic fashion, the CTC appears to penalise the traditional family where one partner works and the other stays at home to look after the children.

For example, you could have two parents who both work but who each earn just below the threshold for higher rate income tax (currently £33,935). In spite of having a joint household income of nearly £68,000, they would be entitled to receive CTC. In fact, as long as the main earner is earning less than £42,000 (or £49,500 in the first year of the baby's birth), then some CTC will be payable.

But in a household where only one partner works and earns just over £33,935, CTC will be gradually withdrawn on a sliding scale and, if he or she earns more than £42,000 a year (£49,500 in the first year), there will be no tax credit at all. It doesn't seem fair, does it?

Anyone who's seen the claim form will also know that it asks a lot of personal questions - couples are required to share information with each other. So people who'd prefer to keep their income private from their partner (for example, those in newish relationships) may be put off applying, as will those who just don't like filling in forms.

Be aware that you won't actually receive a payment for the Children's Tax Credit. If you qualify, the Inland Revenue will simply adjust your tax code so that you pay slightly less income tax via your salary. And it's irrelevant how many children you have - there is only one credit per household.

If you are not sure whether you can claim, you can ring the Inland Revenue's Children's Tax Credit Helpline on 0845 300 1036 or check their website here.