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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Should Working Families Tax Credit be included as NRP's net income?

Working Families Tax Credit has various components, and the above question needs to asked separately of each part.

Components of Working Families Tax Credit

Basic tax credit & 30-hour tax credit

These 2 components are treated together here. The basic tax credit is provided once to the household if an adult works at least 16 hours per week. If an adult works at least 30 hours per week it is topped up with the 30-hour tax credit. (At the moment they are £54 & £11.45).

Is it needed for the NRP to survive (which in effect would be the case for Income Support)? No - it is beyond simple poverty relief (because at least 16 hours at least at the National Minimum Wage should provide at least £59 per week anyway). It is really an incentive to work.

I believe it can plausibly be treated as disposable income for the NRP, a "little bit of wealth", and if other problems can be overcome can plausibly be included in the child support formula. Many people disagree, of course!

Per child tax credit

There is one of these per child. (At the moment they are £26 or £26.75 depending on the age of the child).

There is much less of a case for including this component. While 16 hours per week at the National Minimum Wage is comparable with the Income Support adult's personal allowance, it doesn't pay for the children of the household. Since it is paid per child of this household, it surely has something to do with paying for the children of this household? Where the child is not the NRP's own child, but is the child of the NRP's new partner, there is resentment that "their own child's money" is being siphoned off to pay for a child they are not responsible for. They see this as their money, not the NRP's money. (It isn't really - after all, it would still be paid if only the children existed and not the new partner - but the resentment is still there).

A judgement is needed about whether it should be included. I believe on balance it shouldn't be, but can't identify a killer argument.

Disabled child tax credit

Each disabled child - those with Disability Living allowance or registered blind - gets an extra tax credit. (At the moment this is £22.25).

There is a very good case for not including this in the child support formula. The symbolic effect of "stealing from blind & disabled children" is too potent, especially if the PWC is on Income Support and the money simply reduces the social security bill anyway!

Childcare tax credit

This pays up to 70% of what is spent on certain types of childcare (typically with registered minders but not au pair minders, although the rules are complicated and a bit more flexible).

In effect, this is reimbursement of expenditure incurred while doing what the government wants - getting back to work. It is not disposable income - it is not a "little bit of wealth". It should not be included in the child support calculation.

Consider the effect on incentives to work longer hours. The NRP is examining whether to put in the extra hours; perhaps this needs £100 of childcare per week. The NRP will get up to £70 of this back in WFTC, and so is £30 out of pocket, not £70 better off. Putting the £70 into the formula simply makes the NRP even more out of pocket for using childcare! Not a good incentive to go for it.

Conclusion

There is a very good case for not including all of the WFTC in the formula. Partly this is because some of it doesn't really represent extra disposable income, and would interfere with incentives to work more. Partly this is because of the symbolic effects of taking money that appears to be earmarked for children (possibly disabled children!) in the NRP's household.

It is not a simple judgement - WFTC isn't just poverty-relief in the way that Income Support is, and sometimes the NRP could afford to pay extra child support. But it is probably difficult to identify those cases.

There are other reasons why including WFTC in the formula will lead to problems. I think the government should bite the bullet and remove it entirely from the formula. If it 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.

In general - avoid interference between child support and means-tested benefits/tax credits - they don't mix!

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