Budget 1999: Family Tax Reform - Middle class loses out as children gain

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The Independent Online
A NEW children's tax credit was the centre-piece for the Chancellor's "Budget for families and children" but it will mean middle class couples will lose out.

Mr Brown announced a new children's tax credit worth pounds 416 a year off the tax bill from April 2001. But he is scrapping the married couple's allowance a year earlier from April 2000 and Mortgage Interest Relief at Source (MIRAS) is also being abolished.

The new children's tax credit will be tapered away from families where one or both partners are on higher earnings and paying the higher rate of income tax.

As predicted by The Independent, child benefit escaped taxation in this Budget in spite of Gordon Brown's hint last year that it might not. The Chancellor did not rule out taxing the benefit in future, but the reforms make it less likely because they will enable him to target money to the lower income families through the new children's tax credit.

The Tories accused Mr Brown of imposing "stealth taxes" on Middle England, and even some Labour MPs privately conceded that the Chancellor had given to the poor with one hand but had taken away from the wealthier couples with the other.

"The children's tax credit is a very clever way of getting round the problem of taxing child benefit, which would have been very difficult technically," said a ministerial source.

Scrapping mortgage tax relief and the married couples allowance will hit those on higher incomes the hardest.

There were anxieties before the Budget from Tony Blair about the middle classes being hit too hard by the changes, and in the speech to Parliament Mr Brown stressed: "Every child in the country in every family will get more - not less - support under this system."

But Alistair Darling, the Social Security Secretary, made no bones about the intention to provide more aid for families on lower incomes. A press release by his department was headlined: "Budget boost to help young children in low income families."

The main points of the package, said Mr Darling, were aimed at tackling child poverty. These included an above inflation increase in child benefit which will be payable to all families.

Child benefit rises to pounds 14.40 per week next month for the eldest child and to pounds 9.60 per week for subsequent children.

The Chancellor announced that from April 2000 the rates will be at least pounds 15 for the first child and pounds 10 for subsequent children.

The new child tax credit will go to around five million families.

Maternity Allowance will be extended to all women expecting a baby on or after 20 August 2000 who are earning pounds 30 a week or more, helping 14,000 extra mothers per year.

In addition, there are 20 per cent increases in the rates of benefit payable in income-related benefits for children under 11. From April 2000 the poorest families with a child under 11 will receive nearly pounds 6 a week more.

The Chancellor, who is unmarried, also anticipated an attack by the Tories along the lines that the Government is undermining marriage by scrapping married couples allowance.

"What is today called the married couple's allowance is in fact neither restricted to marriage, nor restricted to couples, nor is it strictly an allowance," he said.

"It is in fact a tax credit paid at the same flat rate to married couples, single parents and unmarried parents living together. Far from recognising marriage it is now so confused that it can even be paid at twice the rate in the year of separation or divorce.

"A married couple's allowance that can pay more for separation or divorce cannot be said to uphold the institution of marriage," Mr Brown commented.

The Chancellor said that with the children's tax credit added to child benefit, families who were receiving pounds 11 a week in 1997 for their first child will in future be receiving pounds 23 a week.

"Taking all our reforms together the maximum support for the first child will be pounds 40 a week, or pounds 2,000 a year for families when they need it most," he said to Labour cheers.

Mr Brown said he had also considered the case for a transferable tax allowance for mothers who stay at home. "The better deal for mothers who stay at home is what we are doing from October this year - the working families tax credit," he said.

A family with two children on pounds 15,000 a year where the mother stays at home would have received nothing under the old system of family credit.

Transferable tax allowances would give them pounds 997, but the Chancellor said that under the working families tax credit they would receive pounds 1,460.

Mr Brown said his Budget would help build a fairer society by increasing support for families with children. He estimated that the overall effects on children would be that families with children with a full-time earner wou ld be guaranteed a minimum income of pounds 200 a week.

A one-earner couple with two children on average earnings of pounds 20,000 will be pounds 460 a year better off. Their tax burden will fall below 20 per cent for the first time since 1979 and will be at its lowest level since 1972.