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					5th International Research Conference
on Social Security
Warsaw, 5-7 March 2007

"Social security and the labour market: A mismatch?"




         "Making work pay"? Tax credits and lone-parent
                    employment in the UK




                                         Jane MILLAR
                            Centre for the Analysis of Social Policy
                                       University of Bath
                                        United Kingdom




International Social Security Association                                           Research Programme
Case postale 1, CH-1211 Geneva 22   Fax: +41 22 799 8509   e-mail: issarc@ilo.org          Web: www.issa.int
      'Making work pay'? Tax credits and lone-parent employment in the UK

                                       Jane Millar
                         Centre for the Analysis of Social Policy
                                 University of Bath, UK

           ISSA 5th International Research Conference on Social Security
                         5-7 March 2007, Warsaw, Poland


Summary
This paper examines the origins, aims, and design of tax credits in the UK, and
discusses the extent to which tax credits represent a new approach to social security. It
then focuses on the role that these transfers play in supporting lone mothers in
employment, including some evidence from an ongoing longitudinal qualitative study
of lone 50 mothers leaving income support for work in 2004.

Introduction
In the UK re-shaping social security in order to make it contribute to better labour
market outcomes has led to an increased focus on supporting incomes in work, using
cash transfers to supplement wages and to ‘make work pay’. In 2003, two ‘tax credits’
were introduced, one for low-wage workers and including provision towards the cost of
childcare, and the other as a family-based credit for children. These are assessed and
paid as part of the tax, rather than the social security, system. Lone mothers – who often
work part time and in low-paid jobs - are particularly likely to be receiving tax credits
to supplement their wages, and tax credits are an important policy lever for increasing
the lone-parent employment rate (which is one of the government’s current targets).
This paper first examines the origins, aims, and design of tax credits in the UK, and
discusses the extent to which tax credits represent a new approach to social security.
The second section looks in more detail at the role that these transfers play in
supporting lone mothers in employment, including some qualitative evidence from an
ongoing study of lone mothers leaving income support for employment.

Tax credits: a new form of social security?
The Labour government elected in 1997 has pursued a very active programme of reform
of social security1. The key policy goals are to raise employment rates, particularly for
disadvantaged groups, and to eliminate child poverty. The two are seen as closely
linked: ‘work is at the heart of our welfare reform programme. .. paid work is the surest
route out of poverty’ (DSS, 1998, p3). These goals have been pursued by two main sets
of policies.

First, the New Deal programmes aim to help unemployed and non-employed benefit
claimants into work, through a mix of jobsearch support, training and practical help to
make the transition to work. Benefit claims and employment services are now
integrated into a single service (Jobcentre Plus) and there are varying degrees of
compulsion to participate in the New Deal programmes (they are compulsory for young
people and long-term unemployed, for example, and voluntary for lone parents and

1
  Including pension reform but this paper focuses on support for people of working age, including
especially families with children.

                                               1
people with disabilities). The aim is to shift from a ‘passive’ system of social security as
wage replacement, to a more ‘active’ labour-market oriented system focused on getting
people off benefits and into work.

Second, there are the ‘make work pay’ provisions, aimed at increasing financial
incentives to work. These include the introduction of a national minimum wage,
reductions in tax and national insurance contributions, and the introduction of a new
system of income transfers to working people, in the form of tax credits.

The origin of the UK’s tax credit system is sometimes ascribed to the example of the
US Earned Income Tax Credit, which was introduced in 1975 but greatly expanded
over the past 10-15 years to become an important vehicle for income transfers to poor
people in the US (for example, by Giddens, in the House of Lords 2006). But, although
the US experience was undoubtedly influential, the origins of the UK tax credit system
can be traced more directly within the UK system itself (Millar, 2003; Adler, 2004).
There has been a system of wage supplementation in the UK since the early 1970s,
which started out as a relatively low level benefit targeted on low-paid full-time
workers but only in families with children. This was extended over the years to more
generous levels of support and to cover part-time workers as well as full-time workers.
By the mid 1990s (just before the Labour government was elected) there were about 0.7
million families in receipt of the Family Credit, almost equally divided between couples
and lone parents, at an annual cost of about £1.7 billion.

The Labour government introduced reforms in two stages. First, in 1999, Family Credit
was replaced by Working Families Tax Credit and the Disabled Person’s Tax Credit.
These took much the same form as the old Family Credit – means-tested on weekly
income, targeted on people with low wages, working above a set number of hours per
week – but were assessed and paid by the Inland Revenue rather than by the
Department of Social Security2. Second, in 2003, these (and various other benefits and
parts of benefits) were replaced by two new ‘next generation’ tax credits: the Working
Tax Credit and the Child Tax Credit.

The aims for these were set out by HM Treasury (2002) as follows:

    •   supporting families with children, recognising the responsibilities that come
        with parenthood;
    •   tackling child poverty, by offering the greatest help to those most in need, such
        as low-income families;
    •   helping to make sure that work pays more than welfare and that people have
        incentives to move up the earnings ladder.

These two tax credits are administered through the same system, with a single claiming
process (discussed further below), but they are targeted rather differently. The Child
Tax Credit was designed to include the majority of families with children (see Chart 2.1
from HMT, 2002). It does this in two ways. First, it covers children in both working and
non-working families. Under the previous system children in working families were

2
 The Inland Revenue is now the HM Revenue and Customs, following a merger with Customs and
Excise. The Department of Social Security is now the Department for Work and Pensions, and includes
what was a separate Employment Service merged with what was the Benefits Agency.

                                                2
supported through Family Credit and those in non-working families through Income
Support or Jobseeker’s Allowance. The Child Tax Credit covers both groups in the
same way, providing an integrated system of support3. Secondly, the means test is
constructed such that most middle-income families (and some high earning families if
they have lots of children) are eligible for a flat-rate amount (paid per family and not
per child), which means that most families with children are eligible at least for this
payment (which was £545 per annum, or about £10 per week, in 2006-7) while lower-
income families receive higher amounts (up to £1,765 per annum per child, or about
£34 per week in 2006-2007). This is the Treasury’s ‘progressive universalism’ in
practice: ‘supporting all children, but offering the greatest help to those who need it
most’ (HMT, 2002, p4).




Source: HM Treasury (2002).

Unlike the broad population coverage of the Child Tax Credit, the Working Tax Credit
is designed to be targeted on low-wage earners. Those with children are eligible if they
work for 16 or more hours per week. Childless people may also be eligible but only if
they are aged 25 and over and working at least 30 hours per week. Eligibility is within
quite a narrow band of income (as Chart 2.1 also shows) before being tapered away
quite steeply. The Working Tax Credit also includes a childcare costs element, which is
restricted to single-earner couples and lone parents, who are using formal care, and pays
70 per cent of costs up to a fixed maximum amount.

Population coverage
Thus there are different groups eligible for either Child Tax Credit or Working Tax
Credit, or for both, including those brought within the range of such means-tested in-
work support for the first time. In December 2006 there were:

3
  This is the intended outcome of the design but is not quite true in practice yet. All new claimants to
income support/jobseeker’s allowance claim Child Tax Credits. But families already in receipt of those
benefits before that date have not yet been ‘migrated’ to the new system.

                                                   3
    •   1.4 million out-of-work families with children receiving Child Tax Credit (or
        equivalent4).
    •   0.3 million in-work single people or childless couples receiving Working Tax
        Credit.
    •   1.6 million in-work families with children receiving both Child Tax Credit and
        Working Tax Credit.
    •   0.6 million families receiving Child Tax Credit of more than the family element.
    •   1.8 million in-work families with children receiving the Child Tax Credit family
        element.
    •   0.1 million in-work families with children receiving less than the Child Tax
        Credit family element.

Table 1 shows the family status of the working families with children according to the
combination of tax credits received, dividing these into two categories. The first is the
2.2 million families who are receiving both Child Tax Credit and Working Tax Credit
or Child Tax Credit at more than the family amount: these are the lower-income
families. The second are the 1.9 million families receiving the family element of Child
Tax Credit or less: these are the better-off families. As the table shows, there is a sharp
difference between lone-parent families and couples. The former are highly
concentrated in the lower income group, with just 90 percent in that group compared
with 41 percent of couples with children5.

Table 1: Families receiving in-work means-tested support, December 2006
                          Couples     Lone parents    All families    Children
Column percentage            %             %               %             %
             1
Lower income                 41           90               54           59
Better off 2                 59           10               46           41

Numbers (thousands)
Lower income                     1,293                  959              2,253              4,242
Better off                       1,845                  105              1,951              3,051
Total                            3,139                 1,065             4,204              7,292
1. Child Tax Credit and Working Tax Credit PLUS Child Tax credit above the family element
2. Child Tax Credit family element or less
Source: derived from Revenue and Customs (2006a), table 2.2

If we compare these figures with the situation ten years ago, in 1995-6, it is clear that
there has been a very substantial increase in the number of families receiving in-work
means-tested support. At that time there were about 0.7 million families receiving
family credit, compared with the 4.2 million now receiving some tax credit payment.
Even if we confine the comparison just to the lower-income families (those receiving
Child Tax Credit plus Working Tax Credit and those receiving Child Tax Credit above
the family rate), there has still been a three-fold increase, up to 2.2 million. There are

4
  See footnote 4.
5
  Almost all employed lone parents are likely to be within the range of Child Tax Credit, since few have
high enough earnings to be excluded. However there is some discrepancy between the population
estimates and the tax credits data estimates, with the latter showing more lone parents than the former
(Brewer and Shaw, 2006).

                                                   4
now about 7.0 million children receiving some tax credit support, including the 4.2
million lower-income children who account for about a third of all dependent children.

The childcare credit part of Working Tax Credit is received by relatively few families.
It is only those receiving more than the family income (the lower-income families as we
have defined them here) that may be eligible, and claims are restricted to formal care
only and, for couples, to two-earner families. In December 2006 there were about
395,000 families receiving some childcare payments, about 18 per cent of the lower-
income families (about nine percent of all with tax credits). This included 137,000
couples and 258,000 lone parents, amounting to about 11 percent of lower-income
couples (four per cent of all couples with tax credits) and 27 per cent of lower-income
lone parents (24 per cent of all lone parents with tax credits).

Assessing entitlement
The tax credits have been described and promoted by the government as a new and
progressive system of support, designed to meet the needs of a modern economy and to
overcome the problems associated with in-work means-tested benefits in the past. The
two important aspects to this, which are different from past arrangements, are the
administration through the tax system and the ‘light touch’ means test.

Delivery through the tax system, rather than through the social security system, was
central to the design from the start (and introduced for the first stage of these credits in
1999). There are both ideological and practical reasons for this, as noted in the Treasury
papers, ‘A tax credit will associate the payment in the recipient’s mind with the fact of
working, a potentially valuable psychological change’ (HMT, 1998a, p8); ‘As tax credit
rather than a welfare benefit, it will reduce the stigma associated with claiming in-work
support, and encourage higher take-up’ (HMT, 1998b, p3). The Treasury also argued
that the association with the tax system would make this transfer more popular with the
public at large, it would be seen as a positive reward for work, rather than as a handout
for dependency.

On the practical side, the tax system also provides the mechanism for the ‘light touch’
means test, which uses information from Revenue data to assess entitlement. Gross
income is defined as for tax liability and awards are based on previous tax years' annual
income, joint income in the case of couples. This award continues in payment for 12
months, unless the recipient notifies changes in income or circumstances. Some changes
end the current award and must therefore be notified - these include changes to number
of adults in the family, ceasing to use childcare or significant reductions in childcare
costs, and the birth of a child. Other changes, in particular changes in income, need not
be notified unless the recipient chooses to do so. There is reconciliation at the year end,
when the new award is calculated, and if there has been an underpayment this will be
covered by a single lump-sum payment. If there has been an overpayment this will be
recovered either by adjusting subsequent tax credit awards or (if tax credits are no
longer due) by adjustments to tax codes.

Thus, the claim process is relatively straightforward in design, although it does still
require claimants to complete a form (rather than being assessed automatically on the
basis of tax records) because tax credits are based on family income while tax liability
is individual. However, in practice there were significant problems in the initial
implementation, with delays and wrong assessments (Citizen’s Advice Bureau, 2005;


                                             5
National Audit Office, 2005; Parliamentary and Health Service Ombudsman, 2005).
The annual reconciliation process has also proved to require rather more adjustment
than the government seems to have expected. The latest figures show that, at the year
ending April 2005, there were about 6.5 million awards made, of which 14 percent were
underpayments and 30 per cent were overpayments (Revenue and Customs, 2006b).
Excluding overpayments of less than £10, the average overpayment in 2004-05 was
about £860 (House of Commons Hansard, 19 Dec 2006: Column 1741W). Under and
overpayments are more common among the lower-income groups (as defined above)
than among the better-off families. About 22 percent of the former were underpaid and
40 per cent overpaid, compared with 5 percent and 13 percent respectively of the latter6.
This is not surprising given the construction of the means test (there is a wide range of
income across which the better-off families receive the same amount). But it may also
reflect greater volatility of income and circumstances among the poorer families, as
well as the fact that they are receiving a more complex package of transfers, including
the childcare element of the Working Tax Credit. Whatever the reasons, this level of
overpayments, which are then recovered from the award in the next year, may be a
source of substantial hardship for some families (we discuss this further below). In
2006-7 the government raised the level of the income disregard (the amount by which
income could rise during an award without affecting the level of the award) from
£2,500 to £25,000, which should substantially reduce overpayments.

A new approach to social security?
There are several features of these tax credits which are new to the UK system. These
include:

      •   The use of the tax system to assess and make payments.
      •   A means test based on an annual assessment of entitlement, with limited
          responsiveness to changes in income and other circumstances during the period
          of the award
      •   The use of a simple definition of gross income, not taking into account capital
          assets.
      •   The separate tax credits for children and for adults.
      •   The same system of support for all children, regardless of the employment status
          of their parents.

There is also a wide coverage of these means-tested transfers. The extension of in-work
age supplements to childless and single people means that all low-paid workers are now
potentially eligible, although it is still mainly families with children in receipt. Almost
10 million adults are in households with some tax credit payments, which is about a
quarter of all working-age adults.

There are also relatively high amounts involved for families in low-paid work. In April
2006 a lone mother with one child under 11 working for 20 hours at the national
minimum wage of £5.05 per hour would receive about £63 in Working Tax Credit, and
about £44 in Child Tax Credit, as well as about £12 in housing and council tax benefit,
and £17 in Child Benefit. Thus more than half of her income in work would come from
state transfers. A couple with two children under 11 and one earner working for 35


6
    Calculated from HM Revenue and Customs, 2006b, table 4 and 2006c, table 1.3.

                                                   6
hours at the 1.5 times the national minimum wage would receive about £13 in Working
Tax Credit, about £78 in Child Tax Credit and £29 in Child Benefit (DWP, 2006a). This
would increase income in work by about one third. The Working Tax Credit would be
paid direct to the earner and the Child Tax Credit and Child Benefit would be paid to
the carer. Expenditure on these tax credits was about £15 billion in 2006.

There are thus various innovations in design and a wide population coverage, extending
means-tested support to many more households in the country. This does not
necessarily mean that the introduction of these tax credits represents a significant new
development in social security policy in the UK. However, when we set tax credits
alongside other policy developments this does seem to suggest a new policy direction.
Thus, as Adler (2004, p88) argues, while there is ‘nothing new’ about either tax credits
or active labour market programmes, the combination of the two ‘is both new and
distinctive’. He traces four models of social security in the UK since the mid-twentieth
century: the social insurance model, the social assistance model, the ‘compulsory’
private insurance model, and the employment model. The employment model, with the
goal of ‘work for those who can’ is both active and conditional. Tax credits are integral
to this model, alongside the New Deal programmes and the increasingly conditional
benefit system.

Tax credits are important in that they represent government recognition of, and attempt
to cover, ‘new social risks’. As Adler puts it, they are:

   ‘a new form of social protection for a set of risks, primarily low pay and the costs
   of childcare, which any traditional social insurance schemes have ignored ……
   [they cover] the “new risks”, like those associated with self–employment, low-
   paid employment, “atypical” employment – including part-time, temporary or
   irregular work, outsourced work, various forms of contract work, “telework” etc –
   separation, divorce and lone parenthood’ (Adler, op cit, p 102 and 103).

The form of the tax credits is such that they cover these new social risks in a way that
seeks to combine ‘continuity of support for those who are not experiencing significant
changes in circumstances or income, with the ability to adjust quickly for those who are
facing major changes' (HMT, 2002, p19). This attempt to balance security with
responsiveness is central to the design of tax credits. But it is also very challenging to
achieve in practice. In the next section we examine the implementation of tax credits
from the perspective of one of the key target groups: lone mothers.

Lone mothers and tax credits: balancing support and security
There are about 1.9 million lone parents in the UK, making up about one quarter of
families with children. Most are lone mothers, typically divorced or separated from a
cohabiting partnership. Lone mothers tend to have lower employment rates than
married mothers, and those who are not employed can receive income support
indefinitely and are not subject to work requirements. Income support provides a low,
but secure, source of income. In the mid-1990s employment rate for lone mothers was
about 44 per cent. The New Deal for Lone Parents was one of the first New Deal
programmes, offering support and advice to help lone mothers into work, and some
limited opportunities for training. Participation is voluntary, although there are now
requirements for lone mothers to attend regular interviews to discuss possibilities for



                                            7
employment. The New Deal for Lone Parents has been successful in helping
participants into work (Evans et al, 2003).

By 2006 the employment rate among lone parents had risen to 56 per cent. The number
of lone parents receiving income support fell by about a quarter, from just over one
million to about 760,000. Gregg et al (2006) review the evidence on the direct impact of
policy on lone-parent employment. They conclude that since 1999 policy changes have
increased lone-parent employment by about five percentage points. The rest of the
increase is due to changes in the characteristics of lone parents and the generally
buoyant labour market conditions in the UK. As they also point out, it is difficult to
disentangle the impact of different elements of policy – the New Deal, the financial
package of support in work, the increase in childcare availability7, financial help to ease
the transition to work - not least because these work together to reinforce one another.
These policies have also helped to reduce child poverty, especially the tax credits
(Brewer et al, 2006). The total number of poor children (poverty defined as household
income below 60 per cent of the median, after housing costs) has fallen from 4.1 million
in 1998/9 to 3.4 million in 2004/5 (DWP, 2006b, table E3). Almost half (48 per cent) of
children in lone-parent families live in poverty, amounting to about 1.4 million children.
This is a significant fall (from 62 per cent in 1998/9) but nevertheless it looks unlikely
that the government will achieve either of the two targets set for 2010, of a 70 per cent
employment rate for lone parents and a reduction in child poverty by half (Harker,
2006).

As noted above, working lone parents receiving tax credits are most commonly
receiving both Working Tax Credit and Child Tax Credit and about half of these lone
parents are working part time, between 16 and 24 hours per week. Chart 2 below (from
DWP, 2006a, showing the situation in April 2006) shows the relationship between gross
earnings and net income for a lone parent with one child under 11 and childcare costs of
£100 per week. This family type would have an income of about £190 per week out of
work, so being in work would make the family better-off financially, even at low wages
(although it should be noted that these ‘model family’ assumptions do not include the
costs of working). Two points are noticeable from the chart. The first is that net income
remains fairly flat over the gross earnings range up to about £500 per week (median
earnings for women in 2006 were about £387). Adam et al (2006) calculate that over
two-thirds of lone parents have an effective marginal tax rate of over 50 per cent.
Secondly, the chart shows that, for low-wage lone parents, the total income package is
complex, with income coming from a number of different sources – wages, child
benefit, working tax credit, childcare tax credit, child tax credit, housing benefit,
council tax benefit. There may also be child support payments from the separated
partner to add to the total.




7
  The number of childcare places has doubled over the past ten years. There is also now universal
provision of part-time school nursery places for all three and four years olds. There is, however, still a
considerable gap between supply and demand for care, especially for affordable childcare that meets the
needs of employed parents.

                                                     8
As discussed above, it was among families in the lower-income range, receiving both
Child Tax Credit and Working Tax Credit or Child Tax Credit above the family
element, that there were most likely to be over or underpayments. In 2004-5 there were
about 180,000 of these lone parents who were underpaid and about 270,000 who were
overpaid. This amounts to almost half of lone-parent recipients, and would include
those with multiple changes in either income or circumstances.

In our ongoing qualitative research, we have been exploring how lone parents and their
children experience and manage the move into paid employment from income support
(Millar, 2006; Ridge, 2006; Ridge and Millar, 2006)8. We carried out interviews in
January 2004 with 50 lone mothers and 61 of their 8 to14-yearold children. The mothers
had all left income support between October 2002 and October 2003 and had started
working and receiving tax credits. The families were interviewed again about 12 to 18
months later9.

These interviews highlighted the importance of tax credits both in enabling the lone
mothers to make the move into work from income support, and in sustaining
employment over time. Tax credits were a significant component of income for these
families, as one woman put it, ‘They’ve been very important, because I couldn’t have
afforded to work without them, they’ve made my income up that much’. Many of the
women were in relatively low-paid jobs and/or were working part-time. Weekly
earnings were not high and tax credits were an essential addition to wages. Thus it was
important for these families that they received their tax credits quickly and accurately
when they started work. Many of the women had help from a ‘Personal Adviser’ at the
time they started work. Personal Advisers are one of the innovations of the New Deal
programmes and the reformed Jobcentre Plus. It is their job to work with individuals,
offering advice and information about jobs, training, childcare, child support and in-
work financial support. They can help to arrange various ‘benefit run-ons’, whereby
income support and/or housing benefit continue to be paid during the first few weeks in
work, and for the payment of any ‘back to work bonuses’ that might be available. They
can also help with claims for tax credits, helping to complete the necessary forms and

8
    Funded by the Economic and Social Research Council (RES -000-23-1079).
9
    At the second round 44 mothers and 53 children were interviewed.



                                                  9
‘fast tracking’ these, so that claims are made expeditiously. About 30 of the 50 women
had some help from Personal Advisers and in general this did help to smooth the
process. For example, Mary had been on income support for about one year after she
separated from her husband and she was now working for 21 hours per week.

Yes, I did go to a fantastic lady … with the job centre, and she was the one that helped
me, worked out the tax credit, all my benefits and she got me some shoes for my first job
… she was great… helped me with the process of filling in the forms and all that … [I
had concerns about] setting up the tax credit and all that, and knowing that it was
going to dovetail in happily, and hoping that I wasn’t going to have some time when I
wasn’t being paid, because I wasn’t getting any benefit, maintenance, from my ex
partner, yes, it was uncertain really. Which is where my lone parent adviser came in,
she was great. Anything that went awry, she helped me through… It was quick … and
the right payment…

But over half of the women did have some difficulties, especially those with complex
work or family situations. There delays in payments, incorrect payments, difficulties in
getting information about what was happening, and lack of information about the award
(see also Griggs et al, 2005). Things were also more likely to go wrong when childcare
tax credit was being claimed, with seven out of the nine women getting childcare tax
credit reporting some problems. These delays could be the cause of financial problems
or debts: ‘I had the nursery screaming at me, saying look we need some money’.

Whether things went wrong or not, the women did not always understand how their
total payment broke down into the different elements: ‘there is no breakdown so you
don’t know what you should be getting or why’, ‘the form they send you to show you
how they've worked it out is not detailed enough because it just says what you've told
them and how much you are going to get. They have not said how they've worked it
out’.

Problems with tax credits for some women were compounded by difficulties in
accessing other sources of income. Housing benefits were often inaccurately assessed,
delayed, wrongly paid or not paid at all. Child Support payments due from former
partners were often unreliable. Wages were not necessarily fixed either as sometimes
hours of work changed or were variable from week to week. All this uncertainty made
for some ambivalence among the women as to whether they were, or were not,
financially better-off in work. Paying off debts, and meeting other in-work costs such as
transport and childcare, also reduced the gains from working. Nevertheless most of the
women were committed to trying to stay in work, and invested a lot of effort in this
sometimes despite difficult work and home situations. In part this was because they
wanted to be independent of income support, but they also wanted to work for financial,
social, self-esteem and identity reasons.

The work experience of these women was, however, characterised by change. There
were many changes of both jobs and hours of work in the first few months. By the time
of the second interviews, about two to three years after leaving income support, seven
women were no longer working, 19 had changed jobs, and 14 were in the same jobs but
had changed their hours of work. This leaves just 11 women with no change of job or
hours. In addition, there were other changes in their lives – new partners, children
leaving home, babies born, changes in childcare, moving house – that could also affect


                                           10
their tax credits. As discussed above, the tax credit system is designed so that it is not
necessarily responsive to these changes at the time they occur. But there are
requirements on claimants to report some of these changes, although not others. The
rules were not always clear, nor did the women necessarily understand how to apply
these to their own situation, of what the consequences of their actions would be.

Chloe’s case illustrates the gaps that can exist between people’s lives and the tax credit
system. At the first interview Chloe had been a lone parent for about two years, she had
three children under ten, and had just started working in an office of a retail
establishment. Her initial claim for tax credits had been paid promptly, although made
more complex because she was claiming for childcare:

 the forms are quite confusing for the working family tax when you want childcare,
because … [paying for childcare] goes on a term more than it goes monthly … so you
have work out each term, how often they’re going to be in and on what days, and then
like, try and balance it out from there’.

By the second interview Chloe was manager of the office and working for more hours.
She also had a new partner, who was living with her and her children, and whose own
children stayed with them every other weekend. The tax credits were still an important
part of her income: ‘they have been obviously they’ve been a big help even on like my
wages £750 a month, if it weren’t for my tax credits, then there would be no point in
working’. But living with a partner meant that she had to notify the Revenue and
change her claim. This had lead to her payments being stopped, while her claim was re-
assessed, and she was still waiting for her award to be sorted out. In her account of the
process, Chloe reflected on the issue of the financial obligations of a new partner, how
much these should be, and when they should be taken into account:

I’ve got to let them know if the circumstances change which I know [but] … it’s hard to
declare it straightaway … you’ve still got it at back of your mind that if you do declare
it straightaway and then everything went pear shaped then you’ve got to wait until April
then to re-claim your money back and it’s just a big gamble to take I think when you’ve
got kiddies and you’ve been in like a situation before which I have where you’re
absolutely flat broke…

They can drop my money to a certain degree but I can’t see how they can take all of
[partner’s] wages into consideration where it’s not, my children aren’t dependent on
him. They’re dependent on me and I’m the one that goes to work, I’m the one that pays
the child care costs, I’m the one that feeds and clothes them. I don’t receive any
maintenance and out of his money himself he pays x amount of maintenance to his ex-
wife to support his own children so I can’t see how they can balance that one out really.
I don’t understand that. I know they’ve got to take it so much into consideration but it’s
not, we’re not even married so we’ve got no children together so I don’t know really
how that’s going to affect the money really..

These accounts show the importance of tax credits to the incomes of these lone-mother
families. But they also illustrate some of the tensions and practical difficulties that arise
in a system which is seeking to balance security and responsiveness. Baroness Hollis of
Heigham was Parliamentary Under-Secretary of State in DWP between 1997 and 2005.
Speaking in a debate in the House of Lords in October 2006, she argued that:


                                             11
   ‘It is fair to say that when we introduced the Tax Credits Bill we did not predict
   that 50 per cent of lone parents would undergo more than a dozen changes in
   circumstance a year. Those include changes in childcare arrangements virtually
   every school holiday, changes in hours worked and sometimes a change of
   partner. …if you seek to track every change and every three to four weeks change
   the credit for half the population claiming tax credits, even if the computer could
   handle it, I doubt very much whether the lone parent could. Such adjustments
   would be made six weeks in arrears and there would be no way in which that
   parent would be able to construct a family budget with such unreliable and non-
   robust flows of income, especially as some of the changes in circumstance cancel
   each other out.’ (Baroness Hollis of Heigham, House of Lords debate, Monday 23
   October 2006)

It is true that there was little information available at the time on the extent of
changes in income and circumstances that the system would have to cope with,
although the Australian experience with a similar sort of design did suggest that
many families would have changes over a 12-month period (Whiteford et al, 2003).
But whether the UK government has yet got the balance right between security and
responsiveness is open to question, and it is among the poorer families where most
of the problems have occurred. There is a clear need for better and timelier
information for claimants, for overpayments recovery to be implemented with
greater care, and for the compliance requirements on recipients to be eased. The
childcare costs credit is a particular source of complexity, not least because any
changes in childcare need to be reported, and an alternative way of helping parents
meet the cost of childcare would remove these problems for the tax credits system.

Tax credits have rapidly become a major part of the income transfer system in the
UK. As a consequence means-testing has become more institutionalised in the UK
system, although it is means testing that takes rather a different form than in the past.
Wage supplementation for low pay is now a key element of British social protection.

References

Adam S., Brewer M. and Shephard A. (2006) The poverty trade-off: work incentives
and income redistribution in Britain, Bristol; Policy Press.

Adler M (2004) ‘Combining welfare-to-work measures with tax credits: a hybrid
approach to social security in the UK’, International Social Security Review, vol 57,
number 2, 87-106.

Brewer M and Shaw J (2006) How many lone parents are receiving tax credits?
London; Institute for Fiscal Studies.

Brewer M, Goodman A., Shaw J. and Sibieta J. (2006) Poverty and inequality in
Britain, London: Institute for Fiscal Studies

Citizen’s Advice Bureau (2005) Money with your name on it? CAB clients’ experience
of tax credits, London: Citizen’s Advice Bureau.



                                            12
DSS (1998) New ambitions for our country: a new contract for welfare London,
Department of Social Security, Cm 3805.

DWP (2006a) Tax/Benefit Tables, London: National Statistics

DWP (2006a) Households below average income, 2004/5, London: National Statistics

Evans, M., Eyre J., Sarre S. and Millar J. (2003) New Deal for Lone Parents: second
synthesis report of the national evaluation, Department for Work and Pensions
Research Report number 163, Leeds: Corporate Document Services.

Giddens, A (2006) House of Lords debates, Monday 23 October 2006

Griggs J., McAllister, F. and Walker, R. (2005) The New Tax Credits system:
knowledge and awareness among recipients, London; One Parent Families.

Harker, L (2006) Delivering on child poverty: what would it take? London: The
Stationery Office.

HM Revenue and Customs (2006a) Child and Working Tax Credits 2006, London:
National Statistics.

HM Revenue and Customs (2006b) Child and Working Tax Credits Statistics -
Finalised annual awards 2004-05, London: HMRC.

HM Revenue and Customs (2006c) Child and Working Tax Credits Statistics -
Finalised annual awards 2004-05; Supplements on payments, London: National
Statistics.

HM Treasury (1998a) The Modernisation of Britain’s Tax and Benefit System number
2, Work Incentives: A Report by Martin Taylor. London: HM Treasury

HM Treasury (1998b) The Modernisation of Britain’s Tax and Benefit System number
3, The Working Families Tax Credit and work incentives. London: HM Treasury

HM Treasury (2002) The Modernisation of Britain’s Tax and Benefit System number
10, The Child and Working Tax Credits, London: HM Treasury

Millar J. (2003) 'From wage replacement to wage supplementation: benefits and tax
credits' in Millar J (Ed) Understanding Social Security, Bristol: Policy Press. pp 123-
143.

Millar J. (2006) ‘Better-off in work? Work, security and welfare for lone mothers’ in C.
Glendinning and P. Kemp (eds) Cash and Care, Bristol: Policy Press.

National Audit Office (2005) Inland Revenue: Standard Report 2003-2004: Child and
Working Tax Credits and Stamp Duty Land Tax, London: National Audit Office




                                          13
Parliamentary and Health Service Ombudsman (2005) Tax Credits: Putting Things
Right, 3rd Report, 2005-2006, HC 124, London: The Stationery Office

Ridge, T. (2006) ‘Helping out at home: Children’s contributions to sustaining work and
care in lone-mother families’ in C. Glendinning and P. Kemp (eds) Cash and Care,
Bristol: Policy Press.

Ridge, T. and Millar, J. (2006) ‘A fine balance: How lone mothers and children manage
work and family’, Poverty, London: Child Poverty Action Group

Whiteford, P., Mendelson M. and Millar, J (2003) Timing it right? Responding to
income changes, a comparison of Australia, Canada and the UK, York; York
Publishing Services for the Joseph Rowntree Foundation.




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