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CLAUSE 53 AND SCHEDULE 11: CHILDREN’S TAX CREDIT: BABY RATE

SUMMARY

1.         This Clause and schedule introduce an additional amount of children's tax credit from April 2002 for the year of a child’s birth.  The clause provides, from 2002–03, for an additional £5,200 of children’s tax credit  at the rate of 10 per cent.  This additional credit will be added to the amount that would be available in respect of an older child. Schedule 11 sets out the consequential changes for the rules for allocation of the credit where the qualifying child or qualifying baby is resident with more than one adult during a year of assessment.

DETAILS OF THE CLAUSE

2.         The provisions for the children’s tax credit are in Section 257AA and Schedule 13B Income and Corporation Taxes Acts (ICTA) 1988. Sub-section (1) of this clause inserts a new subsection 257AA(2A) into ICTA 1988 and provides for an additional £5,200 of children’s tax credit  for the year of a child’s birth, provided that a qualifying baby is resident with the claimant for whole or part of the tax year. It does this by increasing the amount that would be available in respect of an older child in section 257AA(2).

3.                  The children’s tax credit is tapered away if the claimant is a higher rate taxpayer. Sub-section (2) of the clause inserts a new subsection 3A into section 257AA ICTA 1988. This ensures that when the claim is in respect of a baby and the taxpayer is higher rate the tapering relates to the higher amount of credit.

4.                  Sub-section (3) of this clause inserts a new subsection 4A into section 257AA ICTA 1988 which defines the term “qualifying baby” as a qualifying child who was born in the year of assessment.

5.                  Sub-section (4) adds the additional amount of children’s tax credit for babies to the amounts subject to the statutory indexation rules in Section 257C ICTA 1988

6.                  Schedule 13B of ICTA 1988 sets out the rules for allocation of the children’s tax credit where a qualifying child is resident with more than

7.                  One adult during a year of assessment. Sub-section (5) ensures that Schedule 13B is modified by Schedule 11 of the Bill to take account of the higher amount of credit that is available if there is a qualifying baby.

8.                  Sub-sections (6) and (7) provide for the provisions introducing an additional amount of children’s tax credit for babies to take effect in 2002-03, apart from the provision about indexation, which first takes effect for 2003-04.

DETAILS OF THE SCHEDULE

9.                  Paragraph 1 states that Schedule 13B ICTA 1988 (the provisions when a child lives with more than one adult) will be amended in accordance with the rest of the Schedule to the Bill.

10.             Paragraph 3 Schedule 13B ICTA 1988 governs the conditions for sharing the children’s tax credit applying to a married or unmarried couple when neither of them is a higher rate taxpayer. Paragraph 2 of the Schedule to the Bill ensures that where the credit is halved because the lower earning partner makes a claim as well that the halves are based on the higher amount of credit if there is a qualifying baby.

11.             Paragraph 3 adds the birth of a child to the list of circumstances  when a election can be made during the year of assessment to transfer the children’s tax credit to the lower earning partner under paragraph 3(3) of Schedule 13B ICTA 1988

12.             Paragraph 6 Schedule 13B ICTA 1988 covers the situation where a child lives with more than one adult but no two of them are partners in the sense of paragraphs 2 – 5 of Schedule 13B (rules which govern the credit where one or more qualifying children are living with a married or unmarried couple). The children’s tax credit is shared between all the taxpayers who can claim for that child. Paragraph 4(2) of the Schedule to the Bill ensures that if the child is qualifying baby then the share is based on the higher amount of credit.

13.             It is possible under paragraph 6  Schedule 13B ICTA 1988 for a taxpayer to have a number of allotted proportions in respect of different children. These proportions are aggregated to get an overall percentage (which is limited to 100%). The question arises to which level of credit should  apply when there are two different rates of children’s tax credit. Paragraph 4(3) of the Schedule in the Bill ensures that it is based on the higher amount if any one of those allotted proportions is for a qualifying baby.

14.             Paragraph 7  Schedule 13B of  ICTA 1988 covers the situation where in a year of assessment

• two or more sets of married or unmarried couples, or
  
  
• at least one couple, and at least one other individual

could claim children’s tax credit in respect of a child. Paragraph 7 provides that, in these cases, the rules in paragraph 6 about apportioning the children’s tax credit amongst taxpayers should still apply but for the purposes of those rules, each pair of partners should be treated as a single taxpayer. Paragraph 5 of the Schedule to this Bill ensures that Schedule 13B ICTA 1988 is amended so that the amount of credit is based on the higher amount if the child is a qualifying baby.

15.             Paragraph 8  Schedule 13B ICTA 1988 sets the rules for dividing the children’s tax credit when a change of circumstances occurs during a year of assessment. Paragraph 6(2) of the Schedule to the Bill ensures that Schedule 13B is amended so that the new subsection 4A does not apply in relation to sub-paragraph (4) of Schedule 13B. Paragraph 6(3) of the Schedule to this Bill ensures that Schedule 13B ICTA 1988 is amended so that the amount of credit is based on the higher amount if the child is a qualifying baby.

BACKGROUND NOTE

16.             This clause and schedule ensures that an additional amount of children’s tax credit is given where a child is born in the tax year. The additional allowance is £5,200 at 10 per cent, worth an additional £520 off an individual’s tax bill, on top of the normal rate of children’s tax credit

17.             The children’s tax credit was introduced by Section 30 and Schedule 3 of the Finance Act 1999 and takes effect in 2001-02.  Section 34 of Finance Act 2000 increased the amount of children’s tax credit from £4,160 to £4,420, and clause 52 of this Bill increases it further to £5,200, given at 10%.

18.             For families with a higher rate taxpayer, the credit will be gradually withdrawn depending on the amount of his or her income in the higher rate band.