Tax credits: what are they and who benefits? | Tax credits | The Guardian

Tax credits are a mechanism to redistribute income to people on lower wages. There are two types: child tax credits, paid to families with children; and working tax credits, paid to people in work on lower incomes.

More than 70% of families on tax credits are in work. All the 1.4 million out-of-work families claiming tax credits have children and receive child tax credits only.

What’s the point of tax credits?

The main purpose of tax credits is to help families on lower pay make ends meet.

Tax credits are also intended to lift families out of welfare dependency and incentivise people to work – before their introduction, most benefits were withdrawn as soon as someone returned to work.

Have tax credits worked?

According to a BBC analysis: “between 1998-99 and 2012-13 the number of children living in families below the poverty line (defined as less than 60% of the median wage in 2010-11 before housing costs) fell from 35% of the child population to 19%.”

So yes they have.

And because the main criteria to determine eligibility to tax credits is hours worked, there is a clear incentive to find a 16-hours a week job. However, the incentive to work more than 16 hours is weaker: the same analysis shows that for every additional £1 a single parent earns, they lose 41p of tax credit.

But it is important to keep in mind that there is no easy “make work pay” magic formula. According to analysis by NIESR, the plans put forward by the government are expected to worsen the work disincentives embedded in the tax credit system.

Do only the poorest rely on tax credits?

Although tax credits are claimed by families on lower incomes, it is not just those on the lowest incomes that rely on them to make ends meet.

Consider this: there were just under 7 million working families with dependant children in the UK in 2014, according to the ONS. Of the 3.3 million in-work families receiving tax credits last year, 2.7 million were working families with children: nearly 40% of working families with children in Britain rely on tax credits.

In numbers

Broadly speaking any single person earning less than £14,000, any couple earning less than £19,000 and any applicant with children earning less than £40,000 may be eligible for tax credits.Working tax credits can only be claimed by people in work, whether they have children or not. People in work and with children can claim both working and child tax credits, and out-of-work families can also apply for child tax credits.

Tax credit beneficiaries are not allowed to receive universal credit at the same time.

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