Low income families to receive ?1bn in tax credits

Families on low incomes were given a boost yesterday with a promise by the chancellor of a £1bn giveaway over the next three years.

The move was welcomed by anti-poverty groups, which said the chancellor had reacted to evidence that without a rise in benefits he could miss government targets designed to halve child poverty.

Opposition MPs said much of the money would not reach families until next year and the changes were an example of his "pay later" budget.

The bulk of the £1bn will ar rive in 2006/7 and 2007/8 through the tax credit system for families with incomes of less than £22,000.

The government will spend an extra £260m in the first year and an extra £480m in the second year, raising in line with earnings the amount families receive for each child through the child element of the child tax credit.

Other tax credit payments will continue to rise in line with inflation, the chancellor said.

A large increase in childcare payments through the tax credit system announced in the pre-budget report in November will also go some way to helping families on higher incomes with large childcare bills.

From April, the cost of childcare eligible for payments rises from £135 to £175 for a family with one child and from £200 to £300 for two or more children. From 2006, the amount of childcare families can claim rises from 70% to 80% of the total bill and the family income ceiling rises from £42,000 to £59,000.

Lone parents in the home counties will benefit following the decision to extend a pilot in London, Bradford and Edinburgh that boosts incomes in the first year of work.

The chancellor said he wanted to add areas where housing is expensive to the scheme. The extra payment is worth £40 a week up to a maximum of £2,000.

There has been a 40% increase in the number of lone parents returning to work since 1997, which Mr Brown would like to see rise further in the second half of the decade.

Mr Brown said he was asked by some lobby groups to use the resources available to him to raise personal allowances by more than inflation.

"But having examined representations made to me, I have found that using £1bn to raise the personal allowance would give a family in work on median earnings (£23,400 a year) with two children just 80p a week or £40 a year. But using the same resources to raise the child tax credit will give that same family £5 a week, or £260 a year. So the best way to do most to help low and middle income families is not through a further rise in personal tax allowances but through tax credits that offer the best family tax cut."

The rise in the child element of child tax credit will total 13% over three years. Including child benefit, he said, families will receive up to £63 a week for the first child and £111 a week for two children.

Mr Brown said: "Because of rising child tax credits a total of 3 million of Britain's 7 million families with children will now receive more in tax credits and child benefit than they pay in income tax - and have their income tax liability effectively wiped out."

One Parent Families, the charity that campaigns on behalf of single parents, welcomed the tax credit increases but said: "Further child tax credit increases will be essential in future years if the government is to achieve its ambition of halving child poverty by 2010."

The Low Incomes Tax Reform Group said it was disappointed the government had failed to acknowledge the hardship of the 80,000 tax credit claimants who were overpaid, mostly due to computer errors, and have been forced to make repayments.

It said the chancellor should address severe admin problems with the tax credit system before making low income families even more reliant on it.

'This rise makes no difference when I'm losing through their incompetence'

Londoner Ailsa Forbes says the increase in tax credit payments announced yesterday will make little difference to her weekly budget.

Ms Forbes, a lone parent with two small children, is one of the many victims of the tax credit system who must survive on a fraction of her entitlement while her dispute with the Inland Revenue, which calculates annual tax credit allowances, goes through an internal appeals procedure.

The Inland Revenue believes Ms Forbes has been overpaid child tax credit and has clawed back more than £700. She says the dispute goes further, since a computer error in September last year fixed her payments at a level below one agreed with the Revenue.

"It has been stuck at the wrong amount and the Revenue blames the computer, which it doesn't seem to be able to change," she said.

"I'm going into my third year of child tax credit problems, and frankly this rise makes no difference when I'm losing so much more through their incompetence," she said.

Ms Forbes, who works part-time as a product designer for a chain of retail outlets, is one of many single parents to suffer problems with their working tax credit or child tax credit payments.

The charity One Parent Families said in a recent report that a quarter of single parents were overpaid tax credits last year and more than nine in 10 had been forced to make re payments from their current benefit allocation or were waiting to hear how much they had to pay back.

Working tax credit and child tax credit provide income top-up payments, including childcare subsidies.

As at December 2004, 5.9 million families were receiving tax credits. However, it has been dogged by errors. In the first few months computer errors meant millions of payments were delayed.

One Parent Families said there was a growing problem from overpayments that in 80% of cases were due to administrative error.

Ms Forbes joined about 78,000 claimants who asked for overpayments to be written off as they were due to error. Only 1,600 have been written off so far.

She has taken her case to the adjudicator's office, the Inland Revenue's internal watchdog, but has been told to wait at least six months for a verdict. In the meantime, she said, she must live on whatever the Inland Revenue computer decides to pay her.