Assessing the new tax credits

Research published today by the Institute for Fiscal Studies analyses two new tax credits that the Government wants to introduce in 2003: the employment tax credit for low-wage workers and the integrated child credit for families with children. The integrated child credit will bring together existing support for children, but the employment tax credit will offer entirely new support to low-paid workers without children.

The new credits have so far been excluded from the Treasury's public finance projections. The report finds that the credits could cost around ò.1 billion a year to introduce if they are not to make any poor families worse off. This could rise to ò.8 billion a year - the approximate yield of an extra penny on the basic rate of income tax - to ensure that no dual-earner families who currently receive the children's tax credit lose out. The gains from both credits are largest amongst lower-income families, and they tail off as income rises: the poorest tenth of families are set to gain an average of 2.7%, while the richest families are predicted to lose slightly.

Distributional effect of the integrated child credit and the employment tax credit

Around 5.7 million families with children could receive the integrated child credit. A majority will gain from the reforms, but these are principally low-income families. Tom Clark, one of the authors of the report, said: "lone parents stand to gain by the most, by an average of ñ0.37 a week compared to ó.16 a week for couples with children."

The integrated child credit aims to make benefits for children simpler and more certain. Families will get the same payment for children when in low-paid work as when not working, and, in general, payments should be fixed for the whole tax year. But in order to preserve the safety net and concentrate money on the poorest families, the Government will ask claimants to report some changes in circumstances to the Inland Revenue, and this could make the system more complex and less certain for many families. Mike Brewer, one of the authors of the report, said: "whether the reforms achieve simplification depends on how many claimants will have to deal with the Inland Revenue within the tax year, as well as at the start and end. As yet, the Government has provided no indication of how many people will be in this position".

The employment tax credit for workers without children aims to reduce poverty and to make work pay for low-paid families without children. Research included in the report shows that, in practice, workers without children who are in poverty tend to be young or working part-time. Michal Myck, one of the authors of the report, said: "the employment tax credit looks set to go only to those 25 or over who work at least 30 hours a week, so the direct impact on poverty will be small. Only around 400,000 families will be entitled to receive an average payment of around ñ6 a week." Nor will the work incentive effect be great. For most people without children, entering work already increases income significantly because the benefits available when unemployed are low.

Notes to editors

On 31st October 2001, IFS published Commentary 86, Credit where it's due? An assessment of the new tax credits, by Mike Brewer, Tom Clark and Michal Myck. The commentary is available to download from the IFS website.

The integrated child credit will bring together three different parts of the tax and benefit system that support families with children: the children's tax credit, and the child credits and allowances in the working families' tax credit and income support or jobseekers' allowance. Child benefit will not be affected. The employment tax credit will potentially be paid to people with and without children in low-paid work. Both credits will be run by the Inland Revenue. Many details of the policies are still unclear, and the authors had to make a number of assumptions (detailed in the report) when modelling and costing them.

A recent Inland Revenue consulation document on the new tax credits, New Tax Credits: Supporting Families, Making Work Pay and Tackling Poverty, is available on the Inland Revenue's website.

The figures underlying the chart are given below. All incomes were are adjusted for family size.

Distributional effect of the integrated child credit and the employment tax credit