Tax credits aim to beat `benefit trap'

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THE NEW Working Families Tax Credit will make work pay for thousands of people caught in the "benefit trap", family campaigners said yesterday. Although the scheme will guarantee low-paid families a take-home pay of at least pounds 200 a week and make childcare more affordable, they said the greatest benefit would be for those not yet in work.

But businesses said the system would impose an extra burden on employers: the British Chambers of Commerce estimated the bill for running it would be pounds 100m.

Gordon Brown, the Chancellor, launching the pounds 12m advertising campaign for the scheme, dismissed the complaints: "Employers will see the wisdom of this, because they will see they can pay more than the wage they are offering and therefore it will be a powerful incentive for people to take up the jobs." He said it would help cut the number of working-age households, now one in five, where nobody has a job.

But the Conservative social security spokesman, David Willetts, said: "The Chancellor has abolished Family Credit, which was well understood, and instead we have this complicated new system. It is an extra burden, especially on small businesses, which could very well deter them from taking on the very people it's supposed to help."

The scheme, to replace Family Credit on 5 October, will help lift 1.5 million families with 3 million children out of poverty, the Treasury said. Every family with children, with at least one person who works more than 16 hours a week, and savings of less than pounds 8,000, will be eligible to apply.

The system will be run by the Inland Revenue and paid by employers rather than claimed as a benefit from the Department of Social Security. Officials believe this will lead to a bigger take-up than for Family Credit, which is claimed by seven out of ten of the families eligible, or 800,000 households.

The new scheme will cost pounds 5bn a year, pounds 1.8bn more than Family Credit. It provides far more generously for childcare costs. Lone parents will automatically receive the new credit via their pay packet, rather than as a cash benefit, to highlight the link to work. Couples will be able to choose which partner receives the benefit even if one does not work.

"This could discriminate against lone parents, because employers will have to administer the credit and they become reluctant to do the extra paper work for single parents," said Sue Cohen, co-ordinator of Single Parent Action Network. "Lone parents should also have the choice of having the credit paid directly into their bank account."

Families will be guaranteed a minimum take-home pay of pounds 200 a week and will not pay income tax until earnings reach pounds 235 a week. They will receive up to pounds 70 a week for one child and pounds 105 a week for two children who are being looked after by registered childminders, nurseries, play schemes or out-of-school clubs.

"The biggest group likely to benefit are people not now in work, those who want to get back to work but for whom up to now the whole thing did not add up. This ... is really about changing behaviour and making work a viable option for many people," said Colette Kelleher, director of the Daycare Trust.

Maeve Sherlock, director of One Parent Families, said: "The tax credits are a major step forward which will help make work a viable option for more lone parents. The childcare tax credit is especially welcome and will lower a major barrier facing those who are ready to combine parenting with a job."