Tax credits play a key role in helping people
return to work. Gary Vaux looks at the pros and cons.
The working families tax credit and disabled
persons tax credits are vital benefits – especially for people
moving from unemployment to work. However, there are some points
that advisers need to bear in mind. Some of these make tax credits
very attractive – others act as a counterbalance.
Lone parents on income support in particular
are strongly pushed towards WFTC as a crucial supplement to the
wages they could receive if they took a job. As tax credits are not
affected by any maintenance that the lone parent receives, the
total “package” from wages, WFTC and child support is supposed to
create an income that is substantially more than income
As maintenance is counted in full as income
when income support is calculated, the different treatment under
WFTC rules often comes as a major surprise to both claimants and
advisers. I have even known the “generous” tax credit rules act as
an incentive to the parent who is supposed to be paying child
support. They are often reluctant to pay up when they see their
child getting no benefit because the parent with care is on income
support. This can change when it becomes “extra” income that
doesn’t impact on tax credits.
Another big plus with tax credits is the help
with child care. Many early years teams are becoming increasingly
aware of the role that the child care credit can play in making
child care affordable. With help of up to £140 per week
available, there is effectively a very strong child care subsidy
within the tax credit system.
The fact that tax credits are generally fixed
for six months is also a major bonus. Someone who starts work on a
low wage, but expects to earn more within a month or two, can gain
substantially from the fact that the tax credit will be calculated
on the “starting” wage.
So, if tax credits are so wonderful, what is
The biggest is probably the relationship with
housing costs, and housing benefit in particular. Tax credits make
no allowance for mortgage costs, unlike the (admittedly limited)
help within income support. For people who are renting there is
also a very stark trade-off in lost housing benefit. Put very
bluntly, a £60 per week payment of tax credit would generally
lead to a £39 decrease in housing benefit and a £12 rise
in council tax. A number of housing providers have actually noted
an increase in rent arrears recently, as more people move from full
housing benefit into paid work.
The help with child care is also limited – it
is artificially capped at £140, irrespective of the number of
children who need care. A recent claimant we were advising has
triplets – £140 doesn’t go far in those cases.
Loss of free school meals and possibly free
prescriptions often comes as another blow and needs to be costed
into the calculation of whether a person is better off working.
Calculating tax credits isn’t easy, of course,
but help is at hand. The Inland Revenue web-site contains tax
credit calculators – they are accurate and very simple:
It is nearly always worth investigating tax
credits, as they can play a key role in helping people return to
work – so long as you can also spot the pitfalls.
Gary Vaux is head of money advice,
Hertfordshire Council. He is unable to answer queries in person,
either by post or by telephone. If you have a question to be
answered in Welfare Rights, please write to him c/o Community