A good budget for those with children but all too complex

Published on 23 March 2006

A generous Budget for the low-paid with children but no let-up in complexity says the Low Incomes Tax Reform Group

The Chancellor delivered his Budget this afternoon (Wednesday 22 March). While the Low Incomes Tax Reform Group welcomes many of the measures announced today, we feel that more should be done to make the different systems used to help people out of poverty work more coherently and efficiently together. The beneficial effects of above-inflation rises are too often marred by complex interactions which confuse those intended to benefit.

It is a generous Budget for those with children but not for the low paid without children. It is also less generous for the pensioner who gets little apart from additional fuel payments already announced in the pre-Budget statement.

Indeed many of the tax and benefits measures intended to help people on low incomes were foreshadowed in the Chancellor’s pre-Budget statement in December last year, and the 2005 Budget prior to that.

The Chancellor announced that the tax and NIC-free limit on childcare vouchers provided by employers to employees would go up from £50 a week to £55.

The Low Incomes Tax Reform Group comments: “Increasing the level of support for childcare available through the tax credit system will attract more high-earning claimants into the scheme. But for people on lower earnings the interactions between the tax- and NIC- free childcare vouchers provided by employers remain as confusing as ever. When costs are met by the voucher scheme, they cannot also be eligible for subsidy through tax credits, and working out whether people are better off taking vouchers or keeping their tax credits is no easy matter.

“We question whether the extra £5 a week spent on subsidising employer-provided vouchers would not have been better spent improving guidance for low to modest wage-earners on how to make that decision.”

The Chancellor also said that the individual child element of child tax credit will continue to be raised in line with earnings each year until 2009-10:

The Low Incomes Tax Reform Group comments: “Raising the child element in child tax credit in line with earnings rather than inflation is designed to keep the main instrument of support for low-income families with children abreast of growth in the wider economy, and we welcome it.”

The Group commented on the proposed rise in national minimum wage in October 2006 to £5.35. “We welcome any rise in the national minimum wage, but it seems odd to us that a person working full time at that rate, though well below official poverty levels, is nonetheless well above the point at which they start to pay tax. Some synchronicity between the tax and wider welfare system is called for.”

Another change mentioned today but already foreshadowed by the Chancellor previously was to increase the amount by which a claimant’s income can rise in-year before it affects their tax credit award from £2,500 to £25,000 (referred to as the income disregard).

The Group welcomes the raising of the “income disregard” in tax credits to £25,000, which should greatly alleviate the problems the Government has been facing for the last three years with recovery of tax credit overpayments.

Other changes include:

  • Making available a further £250 (or £500 for low-income families) on the child’s seventh birthday for families of children born in and after September 2002 who have received money from the Government in the form of child trust funds
  • raising personal tax allowances (including the age-related allowances), national insurance contributions (NIC) thresholds and child benefit in line with inflation;
  • increasing the child element of child tax credit in line with earnings;
  • raising the amount of support given through working tax credit from 70% to 80% of childcare costs eligible for the credit.


Contact Name: Robin Williamson (Tel: 0844 579 6700 Fax 0844 579 6701)