More than 2m families who could benefit from the new Children's Tax Credit, potentially worth up to £520 a year, have so far failed to put in a claim. The tax break replaces the Married Persons Allowance which was abolished by the government last April. Ministers wanted the cash to be targeted at children rather than just used as a support for marriage despite objections from church groups and opposition parties. But the switch to a means-tested tax relief for people with children will mean that couples need to fill in an Inland Revenue form. Confusion over who qualifies for the credit under the new rules has discouraged many people from making a claim.
Chancellor of the Exchequer Gordon Brown said the credit would benefit 5m families, but only 2.8m claim forms sent out last summer by the Inland Revenue to potential claimants have so far been returned.
The Treasury points out that of the 5m families who stand to benefit from the new, "family tax cut", a million are self-employed and will therefore be claiming the credit in arrears. So they don't count, at least not yet.
Nevertheless, there are still at least 1.3m eligible families out there who, if they get their acts together and their claim forms in by the end of February, could start receiving the tax credit, worth up to £10 a week, in their pay packets from April. If they leave it any later to claim they won't benefit until later and will have to wait for a rebate.
Martin Barnes, director of the charity Child Poverty Action Group, says: "I think the main reasons many people have not yet made a claim for the new tax credit is that so far there has been a lack of publicity about it and a lot of people simply aren't aware that it could potentially give them a sizeable reduction in their tax bill.
"The new tax credit is a significant boost to parents and carers with children. But to get it, you must put in a claim. So anyone who thinks they may be eligible should claim now if they haven't already done so."
The Treasury says a remedy, in the form of a £4.8m advertising campaign, is due to start in February.
The Children's Tax Credit is designed to help families who have at least one child under 16 living with them. It is available to married or unmarried couples and to single parents. To claim you must have at least one child - your own child, a stepchild, adopted child or a child you look after at your own expense - who is living with you for at least part of the tax year and is under 16 at the start of the tax year on April 6.
There is only one credit for each family and if you are living with a partner, you can only have one credit between you, even if you have more than one child under 16 living with you.
Unlike the personal tax allowance, the Children's Tax Credit is not an amount of income you can receive without paying tax. Instead it reduces your tax bill by up to a set amount and this is reflected in your tax code.
New tax codes currently being sent out for the new tax year have an "H" beside the number if you are receiving the basic personal allowance plus full Children's Tax Credit. Eligible claimants should note that if their new tax code has an "L" beside the number, they have not yet made a claim.
You may be confused as to how much the new credit is worth. In last year's Budget it was announced that the credit would be worth up to £442 a year (£8.50 a week) off the tax you have to pay.
However, in last November's pre-Budget report, the Chancellor said it was his intention to boost the credit and make it worth up to £10 a week or £520 a year. So, though £442 remains the official figure that you'll see used in all Inland Revenue booklets and illustrations, it is safe to assume that when the credit takes effect in April it will be worth up to £520 a year.
The credit is paid at the full rate unless the person claiming it is a higher rate tax payer, that is, if their individual income is likely to be more than £32,785 (based on 2000/2002 tax bands).
The credit is reduced at the rate of £1 for every £15 of income taxed at the higher rate. This means that you are unlikely to receive any credit if your income is above around £41,000 (£42,000 at the £520 per year rate). The credit is expressed as an allowance of £4,420 given at the rate of 10% (£5,200 at 10% expected).
If you are a higher rate taxpayer, you may see the reduction of the credit expressed as £2 of the allowance withdrawn for every £3 of income at the higher rate band.
If neither partner in a couple pays higher rate tax, then either of them can have the whole credit or they can elect to share the credit equally between them. Both partners must agree if the partner with the lower income is to have all the credit allocated to him or her. If the partner who receives the credit does not pay enough tax to use all of it, he or she will be able to transfer the unused credit to the other partner after the end of the tax year.
If either, or both, partners pay higher rate tax, the partner with the larger income must claim the credit. One anomaly has arisen in the system as a direct result of independent taxation which means that a family with two working partners can get more tax credit than a couple where only one partner works.
For example, a couple where both partners each earn £30,000, just below the higher rate tax threshold, would be entitled to receive full Children's Tax Credit even though their joint income is £60,000.
In a household where only one partner works and earns just over the £32,785 higher rate tax threshold would have the credit gradually withdrawn and if he or she earned over £41,000 (over £42,000 when the £520 rate comes in), they would get none at all.
• Children's Tax Credit claim forms and explanatory booklets are available from local tax offices, from Inland Revenue and from the the Children's Tax Credit Helpline on 0845 300 1036.
The Child Poverty Action Group has published a factsheet on the Children's Tax Credit. Copies are available on its website at Child Poverty Action Group or if you send an S.A.E to CPAG, White Lion Street, London N1 9PY.
How the credit reduces
The Inland Revenue gives the following example of how the credit reduces for a higher rate taxpayer.
Jeremy and Louise have two children under 16. Louise earns £36,010 and Jeremy earns £25,000. Louise has to claim the Children's Tax Credit as she is the higher rate taxpayer.
Louise is taxed as follows (using 2000/2001 rate bands and personal allowances):
• 0% on the first £4,385 of her income (the limit of her personal allowance)
• 10% on the next £1,520 of her income (that is, at the starting rate up to £5,905)
• 22% on the next £26,880 of her income (that is, at the basic rate up to £32,785)
• 40% on the remaining £3,225 of her income (that is, at the higher rate up to £36,010)
The credit is reduced on £3,225 at the rate of £1 for every £15 = £215
Therefore, the credit is worth £442 - £215 = £227 off the tax that Louise has to pay.
