Letter: Tax credit sting

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Sir: The Working Family Tax Credit will on average provide an extra pounds 25 per week to 1.5 million families, and no family which claims WFTC will be worse off than if they had not claimed it ("Tax credits aim to beat benefit trap", 8 September ).

However, any entitlement to WFTC is gradually withdrawn as household income rises; thus for every pounds 10 by which household income, net of income tax and National Insurance, exceeds the statutory threshold of pounds 4,680 pa, pounds 5.50 (ie 55 per cent of pounds 10) WFTC is withdrawn.

Take the case of a typical WFTC family, one of whose members receives a (say) pounds 1,000 pay rise. pounds 330 of this will go on "normal" tax and NI, leaving pounds 670; of this, 55 per cent (pounds 369) will disappear as "withdrawn" WFTC, leaving the family just pounds 301 pa better off on the pounds 1,000 pay rise: a marginal rate tax on the pay rise of almost 70 per cent.

We calculate that, under WFTC, around one quarter of the UK's 6 million working families will face an effective marginal tax rate of around 70 per cent on their next pay rise: some of the families so affected could be earning up to around pounds 35,000. The long-term impact of the WFTC on household working patterns is far from clear.


Head of Economics

Chantrey Vellacott DFK

London WC1