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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Case Study 1 - Removing the incentive for the NRP to work

The changing situation

(Some of the tax credit amounts date to pre-April 2001. This should not affect the totals by more than about £1 or so).

This article looks at the child support paid by a low-earning non-resident parent as his circumstances change, and he starts living with a new partner who becomes the primary earner.

Stage 1 Just after separation, he is living alone. He is an "absent father", paying child support. He isn't entitled to any benefits or tax credits, so may not be able to afford to share the care of his children.
Stage 2 He then meets someone else, who moves in with him. She already has a young child. He continues to work, she stays at home with her child. They are now entitled to claim Working Families Tax Credit (WFTC).
Stage 3 She is capable of earning the same as him, and now does so, so they are both working. They have to use childcare for the child because there is no one left at home to look after the child. But they can claim some of this back from the WFTC scheme as childcare tax credit.
Stage 4 Now they decide that he should give up his job and look after her child. They don't need to claim childcare tax credit any more (and indeed can't).

The specific amounts assumed in this case are:

  • His or her net income: £120 per week
  • His or her working hours per week: 30
  • Childcare cost per week (if necessary): £100

Stage 1 - he is living alone

This is quite a typical case. Most NRPs earn less than the mean NRP income, and well under the national average male full time earnings.

He is not entitled to any sort of benefit or tax credit relating to children - even if he shares the care of his children.

This stage is probably quite plausible - the £10 child support is much less than a child costs, but the NRP is not wealthy.

Stage 2 - he has a non-working partner with child

He now has a new partner who has a child.

There is no new earned income coming into the household, but he pays lots more child support! New partners of NRPs are suspicious of this, and resent this stage. They believe they (and any children they bring with them) are the sole reason for the WFTC coming into the household, and believe that they are now contributing to a child they have no connection with.

The household has become entitled to a tax credit because of the child. Although he is not financially responsible for the child, in this case it has increased his liability to his own child. In other cases another child would reduce his liabilities. When different schemes interact, don't expect logic!

But at least the household is better off than when he lived on his own.

Stage 3 - he and his partner work, they use childcare

His new partner goes out to work. They have to use childcare because there is no one at home to look after the child.

Now there is more earned income coming into the household, and the household is much better off in total, but he pays less child support!

He pays less child support because when both partners earn the same, the amount of tax credit that is added to his net income for child support purposes is half of the total. (The legislation doesn't define what "the same" means. To the penny? How close?)

Note that the total amount of WFTC received is well under the amount they pay for childcare, yet half of it is being assumed to be available income that can be treated along with other income for child support purposes.

Stage 4 - he stays at home with the child, his partner works

By staying at home to look after a child he is not responsible for, child support becomes £0, and the household is better off than when his partner stayed at home to look after the child she is responsible for.

This will be a common trend - it is much better for him than "stage 2". By looking after a child that he is not emotionally or financially responsible for, his child support is minimised yet he is not required to seek a job.

Compared with stage 3, the household has just £7 less retained income, even though they only earn half the amount of stage 3. They are £25 better off than stage 2 when he was the sole earner.

Society is trying to tell them something - "if you are entitled to WFTC, only one of you should work, and it should be the one who doesn't have to pay child support".

Society is trying to tell Betty something as well - "don't rely on child support, because society may cause the NRP to drop out of work and stop paying child support".

Anne is probably a bit puzzled - why is she better off if her partner who isn't related to her child cares for the child instead of herself? What is society trying to tell her about the value of parenting?

Conclusions

It is important not to try any sort of deep analysis of this. (Just as there is no point in any sort of deep analysis of the shared care glitches). Collecting peculiarities in the reformed scheme is a bit like fishing. There are hundreds out there, just cast your net wide and catch however many you have time for. The trick isn't to catch them, it is to classify them ready to solve the problems.

Child support is calculated according to the individual's income, while WFTC is based on the household, but then assumed to be awarded to individuals according to an arbitrary rule. (50% to each adult if they earn the same, or else 100% to the adult who earns more). There is obvious scope here for playing games to minimise the child support liability.

But also, in the above cases, WFTC is being paid for a child that the NRP isn't financially responsible for, and affecting his payments to a child he is financially responsible for. There is suspicion and resentment that in stage 2 above money intended by the government for the new partner's child is being diverted to a different child. The formula may be justified, but it appears to the people concerned to be arbitrary and unfair.

Page last updated: 18 December, 2003 © Copyright Barry Pearson 2003