Tax credit rates announced for 2008

The Treasury has announced the figures that will be used to calculate Working Tax Credit and Child Tax Credit next financial year, which starts in April 2008. The figures should be of interest to many self-employed people, because those running new businesses often have incomes low enough to qualify for tax credits.

The tax credit system provides a safety net so your income won’t fall to zero even if your net profit does – which in the early stages of a business is quite possible. You can find a PRIME’s own independent booklet explaining the tax credit system here.

So what are the major changes just announced? The basic structure of Working Tax Credit remains the same, but from April there will be a big rise in the “first income threshold”, which goes up by £1,200 to £6,420. This means that from April 2008 you will keep the full amount of whatever WTC payments you are entitled to until you reach the new £6,420 threshold.

The government has paid for this change by increasing the withdrawal rate (or “taper”") that takes effect above the threshold from 37 per cent to 39 per cent. So once your income (or net profit) rises above £6,420 you will lose payments quicker than now.

Overall this change benefits those on very low incomes up to about £7,000, and reduces the amounts paid to those making more.

Another interesting figure in the Treasury’s announcement is the “income disregard”, which remains at the very high value of £25,000 for another year. The income disregard is a kind of get-out-of-jail-free card that can be introduced into disputes about overpayment entirely at HMRC’s discretion. It allows the HMRC to ignore overpayments paid to you up to this amount if it feels like it.

HMRC’s generosity is most likely to arise in cases where it itself has itself made a mistake, and fears press or political pressure should it persist in attempts to claw an overpayment back. So the income disregard is not a right you yourself can claim, but a fudge factor that provides wriggle room for the tax authorities in cases of dispute.

The fact the figure is remaining so high indicates that there are still a lot of disputes going on – though most of these to be fair also involve Child Tax Credit, where the rules are hard to interpret.
Among other figures announced for the 2008 to 2009 tax year is the value of basic state pension paid to those over state pension age. This edges up in line with inflation by £3.40 a week for a single person, to £90.70 a week from next April.

The minimum income guaranteed to poorer pensioners (those entitled to claim Pension Credit) goes up to just over £124 a week for a single person.

This isn’t much to live on – which underlines the need to put other arrangements in place to boost your income in retirement while you can.

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