21 March 2000
TAX AND NICs REFORM FOR WORKING FAMILIES
More measures to make work pay and improve support for families with children were announced by the Chancellor today.
As part of the drive to eliminate child poverty:
- the credit for children under 16 in the Working Families’ and Disabled Person’s Tax Credits is to rise from June 2000 by £4.35 a week. This is in addition to the £1.10 real terms increase in the credit for children aged under 11 and the uprating for indexation already planned in April. These increases will provide more help to around 1.4 million low-income working families and disabled people. Working Families’ Tax Credit will guarantee a family with one child and someone working full-time a minimum income of £207 a week from June;
- the Children’s Tax Credit is also to rise to £442 a year from its introduction in April 2001.
From April 2001, the minimum guaranteed income for a family with one child and someone working full-time will be £214 a week.
More help is to be directed at families when a baby is born, with a package of tax credit reforms to give mothers more choice about their return to work:
- from May 2001, entitlement to Working Families’ and the Disabled Person’s Tax Credits will be re-assessed as soon as a child is born, to reflect the change in circumstances straight away; and,
- so that all families can benefit from this change, a woman who previously worked at least 16 hours a week and receives Statutory Maternity Pay or Maternity Allowance will be treated as meeting the work test for tax credits.
The reforms mean that these families could be up to £30 a week better off in the critical first weeks of a child's life.
The next steps in the income tax and National Insurance Contributions reforms already in the pipeline take effect in April. 24 million taxpayers benefit from the cut in the basic rate of income tax to 22p in the pound – the lowest for 70 years. 16 million employees will pay less in National Insurance Contributions as a result of the increase in the point at which contributions start.
Tax credits measures include:
q increases in child tax credits
1. Budget 1999 had already announced that the child tax credit for children under 11 in Working Families’ Tax Credit (WFTC) and Disabled Person’s Tax Credit (DPTC) was to rise by an extra £1.10 over and above indexation from April 2000, to align it with the tax credit for children aged 11 to 16. The rates and thresholds for WFTC and DPTC rise by 1.6% from 11 April, in line with the increase in the Rossi index in the year to September 1999. And, from June 2000, the child tax credit for children from birth to 16 in WFTC and DPTC will rise by a further £4.35 a week. The additional credit in the DPTC for a disabled child (worth £22.25 a week) will also be extended to WFTC from this October. Around 1.4 million low-income working families and disabled people will benefit from these increases. They will provide a minimum income guarantee in April 2001 of £214 a week for a family with one child in receipt of WFTC and £246 for a family with one child on DPTC. (These figures are based on one earner in full-time work – working 35 hours a week - receiving the national minimum wage of £3.70 an hour.)
q more help for working mothers
2. The Chancellor also announced a package of measures to help families when a child is born. These include an increase of £100 from autumn 2000 in the Sure Start Maternity Grants made to all low income families and changes in WFTC and DPTC to help those working families who are on low incomes. From May 2001, all families will be able to have an existing WFTC or DPTC award re-assessed as soon as a baby is born, instead of waiting up to six months for it to run out. Immediate re-assessment will make these families eligible straightaway for extra child payments (£25.60 per week per child before statutory indexation) and possibly for extra support if their family income has fallen.
3. Currently families where the mother is the sole earner would be unable to benefit from this change because she would not be eligible for a tax credit once she went on maternity leave. So, from May 2001, any mother who works 16 hours or more prior to the birth and is in receipt of Statutory Maternity Pay (SMP) or Maternity Allowance (MA) will count as being in work. This change will also mean that families who receive help with their childcare costs for existing children will continue to be eligible for these payments while the mother receives SMP or MA. SMP and MA will continue to be disregarded in calculating the family’s income.
q New credits for the longer term
4. To make work pay and relieve poverty for people in employment whether or not they have children, an employment tax credit will be introduced from 2003, the Chancellor has announced. It will extend the principle of the WFTC to people without children. Paid through the wage packet, it will complement the minimum wage and the New Deal, providing additional help to people in low paid work. It will be brought in alongside an integrated child credit, also to be introduced from 2003, which will bring together the existing forms of child support (from WFTC, Income Support, Jobseeker’s Allowance and the Children’s Tax Credit) into one seamless children’s payment built on the foundation of universal Child Benefit. The integrated child credit will create a more transparent system of child support and will be paid to the child’s main carer whether in or out of work. It will be administered by the Inland Revenue. (Further information about the new credits can be found in the Treasury paper, Tackling poverty and making work pay – tax credits for the 21st century, published today.)
Income tax measures include
q the cut in the basic rate to 22%
5. The Chancellor confirmed today that the basic rate of tax is to be cut with effect from 6 April 2000 to 22p in the pound. Someone on mean male earnings will gain £3.63 a week as a result of the change. The Chancellor also announced increases in income tax rate bands, income limits and allowances for 2000-01 in line with the rise in the Retail Prices Index to September 1999.
q extending the starting rate to savings income
6. The 10p starting rate of tax is being extended to savings income with effect from 6 April 1999, as the Chancellor announced in his Pre-Budget Report on 9 November. As a result, over 2.5 million individuals will pay up to £152 a year less tax and gain an average of £1.15 a week. The change will particularly benefit 1.5 million pensioners. The existing structure for taxing dividends at 10% and 32.5% remains unchanged.
q an increase in the amount of Children’s Tax Credit
7. The Children’s Tax Credit will rise to £8.50 a week when it comes in in April 2001. Legislation will be brought forward in the Finance Bill to increase the amount of the credit (which is given at the rate of 10%) to £4,420 from £4,160. The credit will now be worth up to £442 off the tax bill of a family with one or more children under 16 living with them. The Children’s Tax Credit replaces the married couple’s allowance and associated allowances (the additional personal allowance, widow’s bereavement allowance and relief for maintenance payments) which are withdrawn from April this year. Women who were widowed during 1999-2000 keep their widow’s bereavement allowance in 2000-01 for the second year of their entitlement, unless they remarry before 6 April.
q indexed allowances for people aged 65 or more
8. The personal allowances for people aged 65 or more rise in line with inflation to £5,790 for those aged 65-74 and to £6,050 for those aged 75 or more. No one aged 65 or more need pay any income tax until their income rises above £111 a week. The annual income limit, above which the age-related element of the allowances is gradually withdrawn, rises to £17,000 for 2000-01. Married couples in which either spouse had reached the age of 65 before 6 April retain the married couple’s allowance when it is withdrawn for other couples. Similarly, a relief for maintenance payments is retained when at least one of the parties to the former marriage had reached the age of 65 before 6 April. The amounts of married couple’s allowance, including the minimum amount of the allowance, are also indexed for 2000-01. The personal allowance for people aged under 65 rises to £4,385, in line with indexation, as announced in the Pre-Budget Report.
National Insurance Contributions
9. The reform of National Insurance contributions (NICs) set out in previous Budgets continues to improve work incentives for the lower paid. With effect from 6 April 2000, the point at which employees start to pay NICs increases from £66 a week to £76 a week. From April 2001, it will be increased again to align with the income tax personal allowance. These changes will take around 1 million people out of NICs altogether, while protecting their benefit entitlement. At the same time, there will be changes to the Upper Earnings Limit, to maintain its relationship with the point at which people start to pay NICs. Also with effect from 6 April 2000, the self‑employed will see the flat rate “entry fee” of Class 2 NICs reduced from a weekly payment of £6.55 to £2 - reducing the burden on low earners and encouraging business start‑ups. The Lower Profits Limit is reduced at the same time and the Class 4 rate of NICs is increased to 7%.
Tax rate for trusts
10. The tax rate applicable to trusts remains unchanged at 34 per cent for 2000-01 and the Schedule F trust rate remains unchanged at 25 per cent.
Home income plans
11. The Chancellor also announced today changes to the interest relief given for loans to purchase certain life annuities (home income plans). For loans in existence on 9 March 1999 that still qualify for relief, these changes will fix the rate of relief at 23 per cent, and fix the limit at £30,000, with effect from 6 April 2000.
NOTES FOR EDITORS
1. The tables attached set out the income tax rate bands, allowances and income limit for age-related allowances and the rates and thresholds for WFTC and DPTC for 2000-01. Tables setting out the effects of Budget measures for people in different circumstances can be found on the Inland Revenue web site at www.inlandrevenue.gov.uk.
2. The Indexation Order which sets out the indexed values of income tax rate band limits, the income limit for age-related allowances and income tax allowances for 2000-01 has today been published by the Treasury.
3. The Up-rating Order which sets out the WFTC and DPTC rates and thresholds for 2000-01 will be published shortly.
4. The relevant Regulations for NICs changes are published in:
· the Social Security (Contributions) (Amendments) Regulations 2000/175 for Great Britain; and
· the Social Security (Contributions) (Amendments) (Northern Ireland) Regulations 2000/176;
· The Social Security (Contributions) (Re-rating and National Insurance funds Payments) Order 2000 (S.I. 2000 No. 755).
5. Copies of these orders can be obtained from the Stationery Office.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 020 7438 6692/6706/7327
(Out of hours: 07860 359544)
Non-media enquiries to: 020 7438 6420/6425
(Office hours only)
Bands of taxable income 2000-011
Income tax allowances 2000-01
1Tax relief for these allowances and widow’s bereavement allowance is restricted to 10 per cent..
2 This is also the maximum relief for maintenance payments where at least one of the parties is aged 65 before 6 April 2000.
3 Withdrawn in respect of deaths occurring after 5 April 2000.
Working Families’ Tax Credit (WFTC) and Disabled Person’s Tax Credit (DPTC) weekly amounts and thresholds 2000-2001
1 The 11-16 and 16-18 child tax credits apply from the September following the 11th and 16th birthday respectively.
2 The disabled child tax credit in the Working Families’ Tax Credit is to be introduced from October 2000.