FOOL SCHOOL
Children's Tax Credit

October 23, 2002

By Jane Mack (TMFJane)

Having only just got to grips with the Working Families Tax Credit, not to mention the extra help now available for childcare, now we have to deal with the Children's Tax Credit. It seems the Government has done a pretty poor job of alerting families to this new method of getting some free money, so it's a good job some people are happy to spread the word on its behalf! Note that this benefit will be replaced by the Child Tax Credit from April 2003 onwards.

The Children's Tax Credit is a form of tax relief that could put an extra £529 a year into the pockets of low-to-middle-income parents each year. It's designed to replace the married couple's allowance, which was abolished during a previous budget. In fact, anyone who previously received the Married Couple's Allowance should have automatically received a claim form already.

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

• married or unmarried couples, or by 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 full credit of £529 works on a sliding scale and is reduced at the rate of £1 for every £15 of income taxed at the higher rate. So, for rough guidance, if one of you is a higher rate taxpayer, then the chances of getting 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 new 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 earn just below the threshold for higher rate income tax (currently £34,514). In spite of having a joint household income of more than £66,000, they would be entitled to receive CTC as long as the main earner is earning less than £42,000.

But in a household where only one partner works and earns just over £34,514, CTC will be gradually withdrawn on a sliding scale and, if he or she earns more than £42,000 a year, there will be no tax credit at all. It doesn't seem fair, does it?

To increase support for families with the youngest children, the Children's Tax Credit is worth up to £1,049 in the first year of the child's birth. This new 'baby rate' is also subject to the tapered reduction of £1 for every £15 of income taxed at the higher rate but it allows tax relief for household incomes of up to £49,000.

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 new 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 (Inland Revenue CTC booklet).

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