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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 support.

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 downside?

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:

www.inlandrevenue.gov.uk/wftc/calc_wftc.htm  

www.inlandrevenue.gov.uk/dptc/calc_dptc.htm  

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 Care.