FOOL'S EYE VIEW
Don't Miss Out On Your Free Cash

By Jane Mack (TMFJane)
May 13, 2002

In spite of the myriad of benefits, allowances and tax credits available, there are numerous people who struggle on low incomes and don't claim half of what they're entitled to, mainly because they just don't know about them. For example, at the end of December 2001, about 5 million families were eligible for the Children's Tax Credit and yet only 3.7 million had actually claimed it. Frankly, it's not surprising when the system chops and changes every couple of years - just as you get used to hearing about one thing, you suddenly find that it doesn't exist anymore and something else has been introduced instead!

It's even more confusing when the Government changes the name of a benefit just to make it sound better. For example, what we used to call 'the dole' was known as Unemployment Benefit until it was changed to the supposedly prettier title of Jobseeker's Allowance. If you're under 60 you might be getting Income Support whereas if you're over 60 it suddenly and magically becomes known as the Minimum Income Guarantee. And when it comes to help with getting back into employment, there's a New Deal for Lone Parents, a New Deal for Partners, A New Deal for Young People and a New Deal for Over-25s!

In fact, on the Government's website about benefits, (formerly the Department of Social Security but now known as the Department for Work and Pensions, of course), I counted more than 60 different types of grants, allowances, and benefits in their A-Z list ranging from Cold Weather Payments for pensioners to Child Benefit for kids, before I completely lost track.

Needless to say, the Chancellor used his recent budget speech to announce yet another batch of changes.  In April 2003, the Working Families Tax Credit, which has only been in existence for a couple of years, will become known as the Working Tax Credit and the Children's Tax Credit which was also only introduced a couple of years ago, will be called the Child Tax Credit.

So what's the difference?

The new Working Tax Credit

The main difference with the new Working Tax Credit is that it is applicable to working people without children as well as families with children. It's irrelevant who is or isn't working since the credit will be based simply on the level of income coming to each household.

It's designed to guarantee minimum incomes of £237 a week for, say, a family with one earner and one child, while couples with no children and, say, a single earner are guaranteed a minimum weekly income of £183. A single person over 25 with no children is guaranteed an income of £154.

You also won't have to apply for it every six months as happens now. The credit award will remain in place for the entire tax year regardless of when you apply and even if you or your partner gets a pay rise (as long as it's not more than £2,500 over the year). If you suffer a sudden fall in income levels through, for example, job loss or because you've started paying for childcare, you can however apply to be re-assessed. If you've got savings – even if they're more than £8,000 - you will still be eligible. The Inland Revenue will simply include the income from those savings as part of their overall calculation.

The new Child Tax Credit

The new Child Tax Credit is designed to streamline all the various 'child' elements currently available via different benefits. For example, there are currently child elements in Income Support, the Jobseeker's Allowance, the Working Families Tax Credit, the Disabled Persons Tax Credit and, rather obviously, the Children's Tax Credit. Phew!  All the child-related elements will be taken out of these benefits and brought together under as the Child Tax Credit.

It will be based on overall household income removing an anomaly under the old system where a single earner on a high income was not entitled even though a dual-earning family on the same income were.

Another key change is that any Child Tax Credit will be paid direct to the primary carer in the same way as Child Benefit is paid. So in the case of a mother who stays at home with the children while the father goes out to work, all the child elements of the tax credit relating to his salary will be effectively removed and paid into the mother's bank account.

For families with an income of less than £13,000 a year, you can expect a minimum of £54.25 a week (including Child Benefit) if you have one child, with a further  £38.50 for second and subsequent children. Families with a household income of up to £50,000 can expect a minimum of £26.50 a week for one child (including Child Benefit). Depending on how many children you've got, for those earning slightly more than £13,000 or £50,000, it'll work on a taper system with a deduction of 37p for every £1 earned over and above those figures. Essentially, it means that families with incomes of up to £58,000 are likely to be eligible. And, with an extra credit on offer in the first year of birth, even parents earning as much as £66,000 may well be entitled to something.

As we've said, the changes to the tax and child credits system won't apply until April 2003 but if you can't wait for the details they are spelt out in a Government document thrillingly entitled ' The Child and Working Tax Credits: The Modernisation of Britain's Tax and Benefit System'. It's only 45 pages long if you can bear to read it.

Don't bothering memorising it though – after all, it's bound to change again in a couple of years' time!

More: Fool's Guide to Investing for Children