DPF Briefing

June 2003

Tax Credits – new system from 6 April 2003

Officers will undoubtedly have noted the various Press reports concerning the new Tax Credit system which starts with effect from 6th April 2003.  

Relevance to yourself
The new Tax Credit system is much more all embracing than previously but there is however one particular problem which will prove extremely onerous namely that the entitlement to tax credits is based on income for the year ended 5th April 2004. Unless a claim is made before 6th July 2003 (the initial claim is based on 2001/2002 income but the ultimate amount payable is adjusted to take account of 2003/2004 income), then monies will be lost.  

Tax Credit claim trap
Thus substantial monies could easily be forfeited in a typical situation where a Tax Credit claim had not been made before 6th July 2003 because a couples income level was expected to exceed the ceiling for Tax Credits for 2003-04 and perhaps due to redundancy the actual income was under the ceiling. Further, the effective marginal tax rate where Tax Credits are involved can be very high because, as well as the normal tax and National Insurance Contributions which would be payable on earned income there will also be a withdrawal of Tax Credit entitlement at 37%. This will result in an effective marginal tax rate for a couple of 70% at an income of just over £20,000 per annum (ie. just over £10,000 per annum each). Since a retrospective recalculation of Tax Credits takes place in arrear (income variations up to £2,500 only are not counted) a modest pay rise can thus be mostly taken away.  

Dilemma – unrealistic time limit – protective claims for Tax Credits
There is a dilemma here for you in deciding whether to make a claim for Tax Credits:-  

1. Clearly if on your projected income (net of tax deductible items) for 2003/2004, you would benefit from Tax Credits then a claim should be made immediately. Broadly you are likely to benefit if your projected income is under exceeds one of the following thresholds (this list is not exhaustive and might be different in the case of, for instance, circumstances such as disability etc.):-
   1. Claim for Children - where there is a claim for a dependent child (which includes a child under 19 in full time education) then where income exceeds £58,125 (£66,350 in respect of a child under the age of 1) then it is unlikely that a Tax Credit claim will be beneficial.
   2. No Children - in the case of single persons the appropriate income ceiling is around £15,000 per annum (and around £19,100 for childless couples). In all cases, it should be appreciated that for couples (including unmarried co-habiting couples) the relevant measure of income is the joint income of the couple net of tax deductible items. 

2. Projected Income above the ceiling - `Protective Claims`  
   The dilemma which you will face is of course that if no claim is made by 6th July 2003 on the basis that your projected income for 2003/2004 is above the level at which a claim would be of value, then you could lose out heavily if the level of income for 2003/2004 falls short of expectations.

Strategy to be followed
As mentioned above in all cases where the projected income for 2003/2004 is below (or marginally above) the levels at which a claim is likely to be beneficial then it will always be essential to make the claim by the deadline of 6th July 2003. (Unless you are already in receipt of Tax Credits having claimed these before).  

Protective claims
In the case of protective claims it may well be that you will take the view that you should claim even if there is only a remote possibility that you will, in the end, benefit from a Tax Credit claim. In this event, you will need to carefully weigh up the effort etc, necessary to prepare a protective claim form against the possible benefits. There is no easy answer here.  

Complexity/bureaucracy of the current system
The great problem here is that, largely because of the unrealistic time limits, the Inland Revenue are imposing a huge amount of bureaucracy on individuals which in many cases will be of no value whatsoever in the end. However, if you do not make a claim within the statutory time limits, you could find yourself in the position of taking a risk that you could lose out very materially.

Intrusive impositions
There are various intrusive impositions attached to making a claim for Tax Credits. Thus for instance, on pain of a £3,000 penalty any relevant change in circumstances (eg. a couple ceasing to cohabit/a change in childcare expense levels etc. etc.) must be notified within three months.  

Great care is needed.

This article was supplied by Norman Christy of George Hay & Co.