NRP's household claiming WFTC
Problems when the NRP's household claims Working Families Tax Credit
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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
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Related topic - NRP incomes and the new formula
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Case Study 2 - Bizarre child support changes as the new partner's income changes

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 new partner's earnings overtake his own, while his earnings stay constant.

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 and earns the same as before. She works and earns, although not as much as him. They are now entitled to claim Working Families Tax Credit (WFTC). 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 3 She gets a pay rise and so now she earns as much as him. He continues to work and earns the same as before. They still claim WFTC and childcare tax credit.
Stage 4 She gets another pay rise and so now she earns more than him. He continues to work and earns the same as before. They still claim WFTC and childcare tax credit.

The specific amounts assumed in this case are:

  • His net income: £140 per week throughout this case study
  • She starts (stage 2) at £120 per week, increases (stage 3) to £140 per week, then increases again (stage 4) to £160 per week
  • Their individual working hours per week: 30
  • Childcare cost per week: £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 £15 child support is much less than a child costs, but the NRP is not wealthy.

Stage 2 - he has a (lower earning) working partner with child

He now has a new (working) partner. They have to use childcare because they are both working.

There is now nearly twice as much money coming in to the household. Indeed, their retained income (after all deductions), is nearly twice as much as stage 1.

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. This has nearly doubled (in spite of the fact that his own income has not changed at all).

The household is much better off than when he lived on his own. This appears to be a sensible situation all round. (Although Anne may wonder why Arnold's child support liability has increased even though he is not earning more. Is it because "her" WFTC - it is her child - is being diverted into child support?)

Stage 3 - his new partner now earns the same as him

His new partner gets a pay rise. She now earns the same as him.

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.

Betty probably says to their child Brenda "gosh, your daddy's new partner is earning more, and they are all better off, so your child support has been reduced by £8 per week!"

(She is very careful not to speak her mind when Brenda is around! Her real views cannot be published!)

Stage 4 - his new partner now earns more than him

His new partner gets another pay rise. She now earns more than him.

As a result, the household's WFTC is no longer attributed to him. It is not income as far as his child support liability is concerned. The household is even better off.

Betty may say to their child Brenda "gosh, your daddy's new partner is now earning even more, and they are now all even better off, so your child support has been reduced even more by £6 per week!"

(It is unlikely that she says this - she has probably gone way beyond "gosh"! She is now getting less than half of what she was getting when Anne was earning less, yet Arnold's earnings haven't changed).

The government says "children should share in the wealth of their parents". Well, Arnold appears to be getting wealthier (with Anne's massive help), but Arnold's own child Brenda doesn't share in this!

Conclusions

[1] The following statement in the CSA Reform White Paper will probably haunt the government!

"Tax credits ... The new tax credits can be paid to either partner. Tax credits will be used to assess maintenance where the nonresident 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: 18 December, 2003 © Copyright Barry Pearson 2003