NRP's household claiming WFTC
Problems when the NRP's household claims Working Families Tax Credit
Should Working Families Tax Credit be included as NRP's net income?
Suggested alternative to treating tax credits as NRP's income
Case study 1 - Removing the incentive for the NRP to work
Case study 2 - Bizarre child support changes as the new partner's income changes
Case study 3 - No incentive for the NRP to earn more
Related topic - Other case studies
Related topic - NRP incomes and the new formula
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Problems when the NRP's household claims Working Families Tax Credit

Working Families Tax Credit & the Child Support legislation of 2000

Working Families Tax Credit (WFTC) is intended to help households with children to have at least one working adult and to be better off than "on the dole" even if wages are low and childcare is needed. WFTC is available to households with at least one child where an adult works at least 16 hours per week. It provides an adult allowance, an allowance for each child, and has a respectable (although not spectacular) partial reimbursement of certain childcare costs. It is means-tested so higher earners get reduced WFTC, and having significant capital rules it out. Probably most households won't be entitled to it.

There are significant differences between what happens when the PWC's household claims WFTC and when the NRP's household claims it.

When the PWC's household claims WFTC, child support payments are totally disregarded. This is is major change from its origins as Family Credit. It is one of the most significant (and welcome) changes in child support in recent years, because it means that the children's household is better off to the full extent of the child support. It also means that this is a private CSA case which the person who started it can stop if they are satisfied with private child support arrangements. This is not the topic of this set of articles, though.

When the NRP's household claims WFTC, typically because the NRP has a new partner with a child (perhaps the NRP's child, perhaps not), WFTC may be treated as the NRP's income for the purpose of calculating child support. The rule is: if the NRP is the main earner, it is treated in full as income; if the new partner is the main earner, it is ignored; if they earn the same, half of it is treated as the NRP's income. This is the topic being discussed here.

This latter rule make the interaction between the NRP's WFTC and child support "badly behaved".

Summary of the problems

Some of these are explored further in the other articles in this set. An important question is "should Working Families Tax Credit be included as NRP's net income?" The answer isn't obvious, but the rules for the reformed scheme are almost certainly "wrong" at the moment.

Problem 1 - having to know the new partner's earnings

The reformed scheme has focused strongly on keeping administration simple. It has kept the number of variables for any case down to 4: the number of qualifying children, the number of children in the NRP's household, the number of nights per week that the NRP cares for the qualifying children, and the NRP's net income. These variables are things that need evidence to be collected and evaluated, and each one is a potential source of error and delay. The drive to keep these variables to a minimum has been relentless, and at the cost of some blatant unfairness in some cases.

But ... now it is sometimes necessary to know whether the NRP's new partner earns less or the same or more than the NRP! This can make a large difference to the calculation - in Case Study 2, it more than doubles the child support liability.

The legislation has considered this. It judges their relative incomes as supplied to the Inland Revenue at the time of the claim for WFTC, not the incomes at the time of the child support calculation. In other words, it lets the Inland Revenue do the collection of the evidence of the NRP's new partner's income! But this may have been up to 26 weeks ago. Perhaps this doesn't matter?

Can the CSA simply get the information from the Inland Revenue, who knew their incomes when they made the claim? Legislation already allows the CSA to obtain the income of self-employed people from the Inland Revenue, but it was restricted to that purpose. It is not clear that there is legislation to allow the CSA to find the relative incomes of the 2 adults in a household claiming WFTC if they are not self-employed. However, this is not an issue to be pursued here, because if the legislation doesn't already exist, presumably the government will bring it in.

Problem 2 - removing the incentive for the NRP to work

This is examined in more detail in Case Study 1.

WFTC already has a problem that because it is fairly generous, and falls off as the household earns more, and doesn't pay the whole of any childcare costs, it tends to encourage a household to be a single-earner household. One parent can work, the other can stay at home and look after the child and avoid the need for childcare, and they need not be much worse off than if they both worked.

When one of the adults is an NRP, there is an even greater incentive for the NRP to become the person who stays at home. He then has neither earned income nor can the WFTC be taken into account, so the child support liability becomes £0. As seen in this case study, this may leave the household nearly as well off as if both of them worked (just £7 per week worse off).

What happens is that the reduction in child support liability has added to the existing incentive that WFTC provides to become a single-earner household - it makes matters worse.

Problem 3 - bizarre child support changes as the new partner's income changes

This is examined in more detail in Case Study 2.

In this case, the NRP earns the same amount throughout. But the NRP's new partner manages to go from earning less to earning more than the NRP. The NRP's child support liability plummets as a result!

As far as the PWC is concerned, the NRP's household, and hence the NRP, has become better off (even though this is not the result of the NRP's efforts). The PWC may expect the "children to share in the wealth of their parents". Instead, the child support received falls to less than half!

By earning more than the NRP, the new partner has removed all of the WFTC as a source of income for the NRP, so that it is not used in the child support calculation. This will surely become an avoidance tactic in the reformed scheme.

Problem 4 - no incentive for the NRP to earn more

This is examined in more detail in Case Study 2.

As the NRP goes from earning less than his partner, to earning the same as his partner, to earning more than his partner (in total earning an extra £40 net per week) his household is virtually no better off (just £2 per week).

The children's household becomes better off - they are £16 per week better off as a result of the NRP earning £40 net per week more. (The Treasury gets the rest). This is a legitimate cause of the attitude: "stuff it, why bother to try to earn more?"

Problem 5 - lack of credibility that all of WFTC is plausibly "income"

WFTC comprises various different types of components. The case for saying that all of these should be treated as the NRP's net income is weak.

For example, the basic tax credit does look like income for the NRP. But the childcare tax credit looks like partial reimbursement of childcare expenses which have left the NRP out of pocket. And taking the disabled child tax credit into account is a hostile newspaper article just waiting to be written!

Conclusion

Whenever the child support system interacts with means tested benefits / tax credits, it becomes "badly behaved". It was the current scheme's interaction with the PWC's Income Support, where child support payments reduced the benefit paid £ for £, that led to rebellion by 70% of PWCs and led to very many children becoming worse off.

Avoiding any interaction between a PWC's WFTC and child support was a vast improvement. It made the children better off, and provided an extra incentive for the PWC to get into work. It also turned such cases into private cases, and effectively withdrew government interference from the lives of the separated family concerned except where one of them invited it in. It is interesting that this most significant improvement in the UK's child support in recent years took place "outside" the child support system itself! (It was designed into the tax credit system). It is probably a lesson that some of the most important changes to child support in future will also occur outside the narrow definition of child support - improvements in the handling of shared care by family courts being an obvious possibility.

Ignoring WFTC altogether in the NRP's child support calculation would sometimes be unpopular with PWCs (although the suggested solution would make some of them better off). It may not be acceptable to the Treasury because of the effect it will have on benefits payments to some lone parents on Income Support. But if significant numbers of NRPs find ways of avoiding it anyway, it may have mainly just symbolic significance anyway. In Case Study 1, it pushes the NRP into giving up work and into paying £0 child support. (This case study is based on a real life case). Perhaps it would be better to ignore it. It would certainly be sensible to ignore part of it.

If the government wants to increase the amount of child support paid by low-earning NRPs, it might be better to do it by adjusting the basic formula, not by bringing WFTC into the formula. As the graph of the basic formula shows, there are special features in the formula to cater for NRPs with less than £200 net income per week. This illustrates that the formula can be quite complicated, as long as the variables (hence the evidence to be collected) are simple. Why not assume that low earners have other means of income, and uprate the amount for low earners? If/when the tax credit equivalent of "Earnings Top Up" (a historical experimental get-to-work benefit a bit like Family Credit for people without families) is introduced, perhaps in 2003, then all low earners will have extra means other than basic earnings. So the formula could safely assume this, and ignore tax credits.

The Treasury may not like this because they may not get their last pound of flesh. They may see some fine tuning which would yield yet more £s or even £1000s! But government should be wary of always doing just what the Treasury demands. The Treasury makes the unpleasant decisions. But often other ministers then have to announce them and suffer as a consequence. A good principle would be "don't do anything unless the Treasury publicly announces that it is their own policy and they will live with the consequences".

References

[1] CSA Reform White Paper (Annex Two):

"Tax credits ... The new tax credits can be paid to either partner. Tax credits will be used to assess maintenance where the non-resident parent is the principal or only earner. If the nonresident parent and his new partner are earning exactly the same, only half of the tax credit will be used in assessing child support liability. In cases where the new partner is the principal earner, we will ignore any tax credits regardless of whose wage packet they are paid into. This reflects the way that Family Credit is treated in the current child support system."

[2] The legislation is in Schedule Part IV "Tax Credits" of:
The Child Support (Maintenance Calculations and Special Cases) Regulations 2000

Page last updated: 5 July, 2004 © Copyright Barry Pearson 2003