In theory, tax credits are crucial extra financial aid for those supporting children and those with low incomes. But on the ground, the process is complex and confusing. Around £4.3bn worth of tax credits went unclaimed last year, and Citizens Advice received over 3.5 million calls last year from people who were confused by the credit and benefit system.
Even if you do successfully claim the credits, a report from the National Audit office this week found that the Government is consistently getting up to £1.5bn worth of payments wrong – overpaying thousands of unsuspecting families, who now find themselves in debt just as disposable income hits new lows.
Child Tax credits
The tax credit system breaks down into two types: child tax credits (CTC) and working tax credits. Around 90 per cent of UK families with at least one child under 16 (or under 20 if they are in full-time education or training) are entitled to CTCs.
The amount you receive will depend on your circumstances and salary, the total number of children in the household, any disabilities they may have, the parents' income, working hours, whether you pay for childcare, and whether you are claiming certain other benefits such as job seekers' allowance or housing benefit.
The maximum allowance per child is £2,085. Those caring for disabled children may get up to £2,540, depending on the disability as well as the family's other personal circumstances. The CTC is designed to help people who are struggling with the cost of raising a family, and the more you earn, the less you are entitled to in credits. Households earning in excess of around £55,000, for example – only £27,500 per adult – may find they are entitled to just £10 per week.
Once those entitlements have been calculated by the HMRC, payments are made on a monthly basis, but you must update your details every year. And the 2008/9 deadline – 31 July – is just a few days away. The HMRC will, in theory, use the details you supplied for the last tax year (2007/08) to determine how much you are paid in tax credits this tax year (2008/09).
CTCs are entirely separate from child benefits, which are paid, usually monthly, to every UK parent or guardian to help towards the cost of looking after British children. In 2008/09, this is £18.80 for the first child per week, and £12.55 for each additional child.
Working tax credit
The working tax credit is for those with low incomes, and recipients of CTCs may also be eligible for this second tax credit. To get working tax credits, you must normally be over the age of 25 and work at least 30 hours a week. But you only need to work 16 hours or more a week if you or your partner are responsible for young children, or are disabled.
Once again, the payments depend on your personal circumstances, but if you pay for childcare while you are at work, you may also get help with those costs, in addition to any CTC, of up to £140 per week for one child, or £240 per week for two or more children.
If you fail to renew your information, it could mean credit payments are stopped and you may end up owing the HMRC thousands of pounds. Some estimate that as many as 200,000 people fail to renew their tax credit information on time. Add the administration and other errors highlighted by the NAO report, and it comes as no surprise that as many as 1.3 million families were overpaid in the last tax year.
In fact, overpayment is so complicated that the calculation is not even explained when the claimant is informed by letter that it has occurred.
The complexity of the tax credit system and the subsequent lack of understanding among UK citizens means that almost 25 per cent of the available tax credits are going unclaimed annually. And Citizens Advice received 3.5 million queries about tax credits and benefits last year.
"Few people understand the tax credit system," says Peter Chadborn of independent financial advice firm, CBK. "There seems to be little literature, and little support from the HMRC to help claimants understand what they are entitled to. It comes as no surprise that so many people are being let down by the system."
It is often the people who need the money the most who end up being overpaid or missing out entirely. "The system is very complicated and confusing," says Katie Lane, social policy officer for Citizens Advice. "It is particularly failing those who are already financially isolated. Some 30 per cent of overpayments went to those earning less than £10,000 per year, for example. Tax credits are linked to other benefits so the claimant often has to go round in circles to update all the interdependent claims."
Although tax credits are just five years old, they have already been simplified once so far, in 2005, with further plans in the pipeline to make life easier for millions of tax credit recipients. These include more flexible payment options for those who have been overpaid.
"We support the HMRC's efforts to simplify the tax credit process," says Lane, "but it must look at those who have already lost out, not just make things easier in the future, if confidence in the process is ever to be restored."
The HMRC tax credits helpline is 0845 300 3900, or go to http://taxcredits.direct.gov.uk. Charities including the Child Poverty Action Group (www.cpag.org.uk), One Parent Families ( www.oneparentfamilies.org), and Citizens Advice ( www.citizensadvice.org.uk) can also help you understand your tax credit entitlement