Receive child tax credits? Read this!

robindunne1

In the conveluted mechanism for calculating tax credit awards there is a key figure which determines how much tax credits you are entitled to in comparison to how much you earn. This is know as the withdrawal rate.

In effect it is a percentage of how much your tax credits will be withdrawn as your income increases. At the moment it is 37% - or your tax credit will decrease by £37 for every £100 you earn.

The withdrawal rate is being increased from 37% to 39%! This means that your tax crdit award will reduce by £39 for every £100 you earn.

See here:

http://www.hmrc.gov.uk/budget2007/pn-complete.pdf

The 2p reduction in income tax was a headline grabbing ploy - and this wipes it out in one swoop.

Gordon Brown really does make me angry!!!!

SparkyMark

robindunne1 wrote: »

The 2p reduction in income tax was a headline grabbing ploy

And not even that much of a big deal at the moment - it doesn't take effect until NEXT April Yet all the tax rises start from THIS April. Giving it with one hand but much later on, yet taking it with the other right now :mad:

robindunne1

The increase in the withdrawal percentage makes it less of an incentive to earn more, and more of an incentive to earn less. (typical Labour thinking)

For people who receive tax credits, this effectively means the 2% drop in standard rate tax is completely ineffective. Taken together with the abolishion of the 10% band it means that all tax credit claiments will be worse off.

As for the increase in tax credit elements. I haven't done the calculations myself, but all the self appreciation that GB gives himself by proudly annoucing the everyone is better off does not include inflation. (how can it be? does the man have a chrystal ball?)

Someone who is supposed to be £200 better off at todays prices, may not be in April 2008 - simpyl due to imflation.

exil

"And not even that much of a big deal at the moment - it doesn't take effect until NEXT April Yet all the tax rises start from THIS April. "

Wrong. The 10pc tax band goes in April 2008, same time as the tax credit changes.

"For people who receive tax credits, this effectively means the 2% drop in standard rate tax is completely ineffective. Taken together with the abolishion of the 10% band it means that all tax credit claiments will be worse off.
"

Wrong again. The tax credits themselves are increasing, and the threshhold at which withdrawal starts is going up by £1200, which increases tax credits . No-one on tax credits is going to be worse off. The ones who lose out will be those on low incomes with no tax credits ie in general, people under 25 and with no kids.

"I haven't done the calculations myself, but all the self appreciation that GB gives himself by proudly annoucing the everyone is better off does not include inflation. "

Well yes - but then I don't know of any chancellor in the last 200 years who has done. Clearly if your income stands still then you'd need a pretty big tax cut even to stand still once inflation is taken into account. What would be more interesting is a calculation that includes the average wage rise and the tax/ni changes. My own back-of-the-envelope calculation suggest that people on about 10k are going to be worse off in 2008-9 than in 2007-8 even with a pay rise of about 3%, if they don't get tax credits. The immediate budget changes don't have much effect either way.

robindunne1

exil wrote: »

"

"For people who receive tax credits, this effectively means the 2% drop in standard rate tax is completely ineffective. Taken together with the abolishion of the 10% band it means that all tax credit claiments will be worse off.
"

Wrong again. The tax credits themselves are increasing, and the threshhold at which withdrawal starts is going up by £1200, which increases tax credits . No-one on tax credits is going to be worse off. The ones who lose out will be those on low incomes with no tax credits ie in general, people under 25 and with no kids.

.

Beg to differ.

The withdrawal percentage is effectively increasing by 5.4% (2/37) - meaning that entitlement will decrease by 5.4% faster than before. Those on certain incomes will end up with no tax credits (apart from the arbitrary family element) when previously they have had a marginal amount.

Putting the figures aside, this is typical Brown. Grabs the headlines with a 2p drop in basic rate, but redresses the balance somewhere else in with the tinkering of a conveluted percentage that hardly anyone understands.

Increasing of tax credits elements and thesholds, whilst increasing the withdrawal percentage only harbours more reliance on the state. There is still an effective 70% on those in the bracket, and the increases in tax credits are effectivley inflationary increases. (The threshold has been at that level for some years)

Bottom line is that nobody is worse/better off but he still gets the headlines.

Milarky

Well spotted robindunne1,

But withdrawal of tax credits is based on 'gross' income, not net. That means the 2p reduction in 'main rate' income tax (eh-erm, overlooking the disappearance of the 10% rate band!) from 22p to 20p is clawed back through tax credits admittedly - but that is not an increase or a reduction either.

In 2007/08, for each £1 earned above the threshold 11% goes in NI 22% (or 10%) goes in tax AND 37p in WTC withdrawal - that's a effective tax rate of (37+22+11)% or 70% (it's 58% in the 10% band)
In 2008/09, it becomes (39+11+20)%, which is 70% again.

Meanwhile, the raising of the threshold on earnings from 5220 to 6420 at which the tapering commences will (because 37p is withdrawn above the threshold) give all claimants an intital 'boost' of 37% of (6440 - 5220) minus 10% of 2330*

37% of £1200 = 444
10% of £2330 = 233 (minus)

which is a 211 gain overall

However, the gov't is guilty of weasel words - employing a non sequitur in stating:

raising the withdrawal rate on tax credits by 2 per cent to 39 per
cent, helping to retain the current focus of tax credits;

*That's the 10% band effectively going up to 20%

A final thought is that, with tax relief on things like pension contributions and gifts to charities going down from 22 to 20 percent, the effective rate of tax relief for TC claimants makng such deductions from income is maintained (at 70%) rather than dropping (to 68%) which the effect of the 2p tax cut would otherwise have been.

exil

robindunne1 wrote: »

Beg to differ.

The withdrawal percentage is effectively increasing by 5.4% (2/37) - meaning that entitlement will decrease by 5.4% faster than before. Those on certain incomes will end up with no tax credits (apart from the arbitrary family element) when previously they have had a marginal amount.

Putting the figures aside, this is typical Brown. Grabs the headlines with a 2p drop in basic rate, but redresses the balance somewhere else in with the tinkering of a conveluted percentage that hardly anyone understands.

Increasing of tax credits elements and thesholds, whilst increasing the withdrawal percentage only harbours more reliance on the state. There is still an effective 70% on those in the bracket, and the increases in tax credits are effectivley inflationary increases. (The threshold has been at that level for some years)

Bottom line is that nobody is worse/better off but he still gets the headlines.

Well - again not true. The threshold is increased by £1200 (haven't I already said this) so no-one getting tax credits will lose them. Someone on about 10,000 a year entitled to TC will see this happen

10% tax band removed -£223
2% tax cut +£100
2% withdrawal rate -£70
increased threshold +£440

total - about £200 better off.

The marginal effective tax rate ie the amount you pay on every extra £1 you earn will remain at 70% for people on tax credit. (higher for people on CTB and HB).

But - what else can Brown (or his Tory equivalent) do? If the withdrawal rate is set too low, then everyone will get tax credits and most of the money will go to people who are not by any stretch of the imagination hard up. Too high and you end up with a very high marginal tax rate. Abolish them and people on low incomes will be getting less than they would on the dole. Or are we going to abolish the dole?

Personally I would reduce tax credits by greatly increasing the personal allowance - but to make the books balance I would then have to increase the headline tax rate to about 40% or even more.

Tax credits exist in one form or another in most countries - even the USA has them. Difficult to see how, with wage rates so low in many jobs, we can do without them.

robindunne1

exil wrote: »

Well - again not true. The threshold is increased by £1200 (haven't I already said this) .

?????????

I can only see the threshold increase for people claiming WTC only and not CTC. At the moment this is around 14k and only ever seems to increase by a marginal amount in line with inflation. All the bumph I have read from the current budget does not make any such increase clear. If so, your calculations for those with children are invalid. Does anyone know any different?

I agree with you regarding the tax credits. The Americans give an allowable deduction on income according to how many children you have. Meaning those with more kids pay less tax in the first place.

I cannot see why people on the minimum wage pay income tax at all. If the personal allowance was set at a sensible level there would be no need for tax credits. Instead we have a stupid situation where someone working 16 hours can call themselves "full time", pay no tax and then receive a massive tax credit award. Working more will simply mean a reduction in tax credits.

isasmurf

robindunne1 wrote: »

?????????

I can only see the threshold increase for people claiming WTC only and not CTC. At the moment this is around 14k and only ever seems to increase by a marginal amount in line with inflation. All the bumph I have read from the current budget does not make any such increase clear. If so, your calculations for those with children are invalid. Does anyone know any different?

The "CTC only" threshold is based on the WTC threshold, rates and taper rate. Therefore, by default if anything changes in WTC then CTC threshold changes. Anybody in work and eligible for WTC but has too high an income to get it, will see an increase because WTC is included in their award calculation. They don't see WTC because it has been reduced to nil by their income, but until WTC is reduced to nil, CTC does not begin to get reduced.