Credit or liability?

    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
    .

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