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A new system of Tax Credits was introduced from 2003/04. It is a major change to the way in
which the tax system provides support to people with children and workers on low incomes. Tax
Credits are paid to those who claim them, and are not an adjustment in the tax computation.
Working Tax Credit (WTC) is paid to employed and self-employed people on low incomes. The
full entitlement is given for an income of only £5,220, and it is tapered away as a
couple's joint income increases above that.
There is an additional element which will cover 80% of qualifying childcare costs of up
to £300pw (up from 70% in 2005/06) for two children, and a couple entitled to this can
enjoy substantial credit even on incomes over £30,000.
Child Tax Credit (CTC) is paid to the main carer for children up to 16 years old, or up to
18 in full-time education. Entitlement is built up of elements for each child, and for "the family".
The child elements are tapered away as income increases. The family element of £545 will be
paid in full to couples with a combined income of up to about £50,000; after that, it will
be tapered away to nothing by the time the joint income reaches £58,000, or £66,000
in the year a child is born.
Claims are made provisionally for the coming year based on a previous year's income (2005/06
for 2006/07 claims), and may be revised up or down at the end of the year if income has changed
significantly.
However increases in income will be disregarded in 2006/2007 if they are up to £25,000
(increased from £2,500).
The new system is very complicated, and this can only serve as a brief summary. The HM Revenue
& Customs website (www.hmrc.gov.uk) has a ready-reckoner
facility which will estimate the amount of either tax credit due, and also has forms and details
of how to apply.
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