New family tax credit not child's play

Families expecting to qualify for the new Children's Tax Credit should be sorting out their paperwork with the Inland Revenue now. The credit, which starts in April, is expected to be available to about 5 million working households and could be worth up to £520 to some families.

In the pre-Budget statement last week, Chancellor Gordon Brown said he would increase the maximum benefit from the £442 which is currently planned to £520. Although he did not say when he would do this, it is highly likely - with an election looming - that the increase will come through when the credit is launched. The credit replaces the old Married Couples Allowance and the Additional Personal Allowance, which were stopped last April. Only the self-employed will receive the credit as a lump sum payment: for others it will merely reduce the tax that is deducted at source.

'Because it is like a tax allowance, it doesn't help the very poorest families who aren't working,' says Mike Brewer of the Institute for Fiscal Studies.

One disadvantage is that it is not straightforward to understand. Claimants need to consider several issues:

• It is available to married and unmarried couples and to single parents equally. To qualify they need to be taxpayers and to have at least one child under 16 at the start of the tax year. The child needs to be living with them for at least some of the tax year. Only one credit is available per household.

• Claim forms were sent out to people who used to get Married Couples Allowance and the Additional Personal Allowance in June. But many other people now eligible may not have received a form. You should contact your tax office to ask for a claim form.

You will need to tell the Inland Revenue how much you - and your partner if you are in a couple - earn. If just one of you is working, that one will make the claim. If both are working, and both are basic-rate taxpayers, then you can split the credit between you. If one of you is a higher-rate taxpayer, that one has to claim. If you are both higher-rate taxpayers, the higher earner claims.

• A self-employed claimant will have to apply at the end of the tax year for a repayment of the credit. The application can be done through the tax return or through a repayment claim form.

• Although families will be able to save up to £442 (or probably £520) in tax a year, the credit is formulated in a slightly more complicated way. The actual credit is set at £4,420 a year; an allowance which is set against the claimant's earnings. It will reduce the tax rate on those earnings by 10 per cent ; hence it produces a maximum reduction in the tax bill of £442. For higher-rate taxpayers, their total allowance is reduced by £1 for every £15 of income that they earn over the higher-rate threshold.

• Claimants will also be able to get Child Benefit, Working Families Tax Credit and any other benefits or allowances they qualify for.

Copies of Inland Revenue booklet 'CTCR/1 - Children's Tax Credit' are available on 0645 000 404 or on www.inlandrevenue.gov.uk.