Tax Credits Bill

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Mr. Flight: I thank the Minister for an even more lucid explanation. Perhaps she, too, should have been a barrister.

May I make a point that I tried to make on Tuesday afternoon, when she was not here? To help people understand, could we not use coding for negative income tax, as we do for positive income tax? Would not that make the issue clear? People would be coded according to their circumstances; the code might or might not change, depending on the margin of change. The code would be corrected at the end of the year, when updated information was available. Such an approach would be easier to understand, because people are already familiar with the mechanism and language through tax liabilities, as opposed to tax credits.

Dawn Primarolo: Although I understand the hon. Gentleman's point, my experience as a Minister and as an MP in my surgeries is that there is not a clear understanding of the tax code. It is always a challenge when people say, ''You're a Tax Minister, explain my tax code.'' The problem with the PAYE code is that many people interpret it as a value that they will receive. Instead, it is the rate of tax in a category.

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That is particularly true of the groups that we are discussing. They are in the PAYE system—the self-employed would be able to decipher it—but a code would make the issue even more complex, because it would remove the statement that we will provide, which will show income and tax credits, and which will give information about notification of changes.

The Opposition have been attracted by the use of PAYE codes at different times; however, another advantage over PAYE codes is that tax credits will be clearly identified on the pay slip. The individual will receive a reconciliation of credits every pay period. If we were to show them as codes, how would people identify their tax credit, the change in the threshold or anything else? The Opposition's proposal would be more complicated than our approach. In a sense, we are using that method: people will apply, and we will provide a statement with everything clearly laid out so that they know where they stand.

The hon. Gentleman's final point was about end-of-year reconciliations. The P60, P45 and so on are used for the end of year reconciliation but are also needed for the following year. There is no additional burden; the tax credits are simply part of the process for the following year. The two are streamlined so that they are done at the same time: the first is closed off to determine the previous year's income, and that is moved forward into the calculations for the following year's tax credits.

The question of thresholds was raised by the hon. Member for Northavon. That happens now in the working families tax credit, and there are variations. There is no adjustment in WFTC, so people do not understand why incomes rising or dropping dramatically has no effect until they get the next renewal. In our view, it is more confusing to try to carry forward constantly artificial figures than to explain what is happening at that point. I have seen constituents who received WFTC not get it on renewal because shortly after they were first allocated it, their income increased beyond the threshold. Many felt that that was unfair and that we had taken it away from them, but there is no other way of working without doing what the hon. Gentleman wants to avoid and making the system horrendously complicated.

10.30 am

Mr. Hoban: I want to return to the year-in reconciliation procedure, because it bugs me somewhat. If someone's income increased below the threshold so that the in-year tax relief payment remained unchanged, would there be a clawback of the overpayment at the end of the year?

Dawn Primarolo: If the rise were within the threshold, there would be no clawback. The increase would not be taken into the accounts, so the claimant would stay in the previous year's assessment. The reconciliation would see whether the claimant stayed in the previous year or came into the current year. If we set the threshold for a rise and the increase in income is within it, the increase is not taken into account at the reconciliation. The point made by the hon. Member for Northavon was that that would be seen as income in the next 12 months' assessment.

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Mr. Webb: The Minister mentioned P60s. They do not become available until some point during the tax year, so will she clarify the timing? Will one know at the start of the tax year what one's tax credit will be for the whole of the year, before one receives a P60? How will that work?

Dawn Primarolo: It will work much as PAYE codes work. The coding runs on until new coding notices appear. We set the thresholds in the Budget, which is in March, and then the tax year starts and the next coding notice comes out. Pensioners have often made that point, and I know that the hon. Gentleman too has made it repeatedly. Credits will be running on a tax year, but we need the information that becomes available. The hon. Gentleman asked whether there would be a period when people do not get anything. There will not be a break; one credit runs into the other, and the system irons everything out year on year.

The hon. Gentleman will see when we get to later debates that it is conceivable that other income will need to be taken into account. I do not want to run forward into that discussion and what information needs to be supplied, which might be about modest savings that none the less produce an income. It will be much like self-assessment. Clause 23 details the arrangements, which are that the payment will continue into the new year to give time for the P60 to arrive and a new reconciliation to be made. The essential point is that there is no break in the award. Once people have started, they do not stop unless they come out.

Ms Buck: I am grateful to the Minister for that reply. Not only did it add greater clarity, but it was sympathetic in spirit to some of the concerns that have been raised by child poverty groups, who rightly see the issue at the heart of making the Bill work. There was a helpful exchange about the treatment of excess income below the threshold, which is something that people are anxious to understand.

There is concern about people's comprehension of the different clauses and their interaction. When it comes to surgery this is key stage 1 compared to the A-level that is housing benefit. We do not need to be too anxious. As the Minister said, there is an inevitable trade-off between simplicity and responsiveness. There is no getting around that without unlimited resources. In its spirit, the Government's action is right in trying to find that balance.

I appreciate reluctantly that we shall not have figures to chew on. I urge the Minister, when the modelling is done, to press for the maximum generosity that is consistent with avoiding the problem that we have identified, which is a cliff edge for people who exceed the threshold, particularly in the following year. The Minister did not respond to one or two specific questions which it may be possible to answer without straining for the figures: whether the amount described under clause 7(3)(a) and (b) will always be the same and whether the Government intend to describe an amount in clause 7(3)(d). I am happy for those questions to be answered in a note. I beg leave to withdraw the amendment.

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Amendment, by leave, withdrawn.

Mr. Webb: I beg to move amendment No. 47, in page 5, line 26, leave out

    ', aggregate income of the persons'

and insert

    'income of the higher earner'.

The Chairman: With this it will be convenient to take amendment No. 48, in page 5, line 32, leave out

    ', aggregate income of the persons'

and insert

    'income of the higher earner'.

Mr. Webb: I can explain what I am driving at simply and briefly. We are integrating what is essentially a social security benefit, the working families tax credit—a renamed version of family credit—and an element of the tax system, the children's tax credit. Decisions have had to be made throughout as to where the workings of the tax system and the benefit system are different, and which way to jump. The Bill provides for decisions on unit of assessment. Most Government rhetoric says that this is about the tax system and is to be run by the Inland Revenue, but such an assessment is to be made on family or household income.

The amendments proposed have a blunderbuss effect in that if we went all the way on the terms of our amendments, not only would we be going for individual assessment for the rich—I should not use that word—for higher earners, but also for those on low incomes. I do not want to go all that way. The amendments seek to probe the Government's thinking about one particular group—I am sure that the Minister knows precisely where I am heading—which is the people who for the last two years, including the current one, have been able to receive children's tax credit. Those are couples who are both on a middling to higher income who receive a full children's tax credit under the present regime because it is individually assessed, but who under joint assessment might lose some or all of their CTC.

In order to obtain some realistic figures, I tabled a couple of questions a week or two ago. I asked what an average teacher and an average nurse earned and I was slightly startled by the answers. An average full-time qualified nurse working in the national health service and receiving all additional payments and allowances earns £450 per week. An average qualified teacher in the maintained school sector earns £550 per week. Add those two together, so a teacher married to a nurse—on typical average figures; I am not trying to rig the figures—will earn £1,000. An average teacher married to an average nurse has a gross weekly income of £1,000, or £52,000 per year. As I understand the way that the tapers on CTC work, under the present thresholds that would entirely exhaust their entitlement to CTC. If it does not I will want to know why not, because my family's joint income is precisely that and we do not get any CTC. I am not trying to declare an interest here. Nor do I suggest that I should receive it. Can the Minister offer any reassurance to families in that situation?

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I have should have checked this, but I recall that about 900,000 might lose everything and 500,000 might lose something. Those are people who have lost the value of the married couple's tax allowance, have had a year with nothing, then got £520 of CTC for two years and may be about to get nothing again if the Bill goes through unamended. Not all of them are in dire poverty, but we should remember that we are talking about an amount per family, not per child. It might be the couple I described: the nurse married to the teacher who have several children and an income of £52,000 in total. By the time they have catered for the children their income might be much lower, on an equivalent basis, than that of a childless couple who earn a lot less. Yes, there will be rich people to whom we would not want to give the tax credit, but I am not sure that a nurse who is married to a teacher and has received it for two years should expect it to be taken away overnight in 2003. What plans does the Minister have to protect such couples?

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