Mumsnet has not checked the qualifications of anyone posting here. Free legal advice is available from a Citizen's Advice Bureau, and the Law Society can supply a list of local solicitors.

Is this how Tax Credits work?

(54 Posts)
zazas Fri 10-May-13 19:25:44

So my friend has a one year old does not want to go back to work. Her husband who is self employed does not earn a huge amount averaging about £900 a month but by claiming tax credits etc (they have 2 children) and with his income low they are entitled to nearly £700.00 a month in tax credits etc - £1700 with child benefit. As she says it makes no sense to go back to work part time and pay childcare or her husband to work harder when they can earn this which they can live on. They always take a month off in summer to camp in Europe and probably another 4 weeks in holidays spread throughout the year and this 'helps' to keep his income low.

If that is the case why don't more people (or do they) do this rather than work to earn just a tiny bit more? Or am I missing something here?

zazas Fri 10-May-13 21:19:27

lougle - I guess what I man re not viable is that there is not the demand enough for what he does where we live therefore he is struggling to make more money = plus he is the only earner...

zazas Fri 10-May-13 21:21:31

and it is full time - so perhaps better saying it is not economically viable for them as a family?

In 2007-2008 I worked with a salary of £14000 pa. In my hand I got £941 per month.

So looking at those figures, I cannot see the issue. Being self employed doesnt always mean raking it in. And if someone can earn the same as a retail manager by being self employed, why wouldnt they?

We get not far off £700 pm in tcs and cb for 2 kids. Thats what the rate is.

If you look here and divide the amount for two kids on an income of £15000 by 52 (weeks in year) and multiply by 4 (usually paid four weekly) you get £550. Add £134 Child Benefit and the total is £684.

morethanpotatoprints Fri 10-May-13 21:47:18

Hello OP, yes that is right and similar to our household when we had 2 to claim for.
Obviously if your friend was working the household income would be more and then they would get less Tax Credits.
Your friend would be entitled to claim WTC in her own right if she was to be employed by her dh as a book keeper and would also be entitled to UC when it changes over, although she would be expected to earn a certain amount and work a certain amount of hours. For some people it isn't worth working, it wasn't for me either.

zazas Fri 10-May-13 23:32:07

morethanpotatoprints - yes that is what she worked out - "it wasn't worth her working" - we both were left wondering about it...!

zazas Fri 10-May-13 23:41:02

wannabedomesticgoddess - what we were talking this afternoon together was that how 'lucky' she felt that she could access Tax Credits instead of working, even though she is well qualified and can earn more than her husband (and he could look after their toddler) but she would rather stay at home for a few years and enjoy long holidays together. As she said she is only being given what she is 'entitled' to but finds it incredible that when she worked (even only 16 hours) she received no tax credits but now that she does receive them and even though it is less money, the difference is not enough to justify working. We were both surprised to discover that "Is this how Tax Credits work?" and then wondered do lots of people choose to use them like this - rather than 'need' to?

Tax credits were marketed to families with tv adverts showing people jetting off on holiday. It was supposed to be a perk. A Good Thing.

So your friend using them to spend a few years with her child sounds like something they were intended for in the first place.

Its the propaganda of this government that has turned things around and has made claiming Tax Credits into A Bad Thing. You wouldnt even be asking this question if it werent for the media feeding you and your friend the idea that she is doing something immoral.

CogitoErgoSometimes Sat 11-May-13 05:59:02

I don't think 'propaganda' is to blame at all and I quite understand the point the OP is making. Several years ago I helped a young friend (lone parent, works part time, uses a CM and has a child) check what she would be entitled to in the way of tax credits, housing benefit and so on. The total was far higher than either of us expected and, grossed up as a pre-tax salary in the traditional sense, was way in excess of anything someone with her lack of qualifications and experience could ever hope to actually earn. The 'incentive' for my friend was therefore to maintain the status quo rather than get extra hours, go full time, get extra qualifications etc. I think that's always been the flaw of the tax credit system. Not that it is a 'Bad Thing' or immoral but the unintentional consequence of short-term help actively discouraging long-term ambition.

It may be a flaw. But claiming has never been viewed in such a dim light before. The flaw is with the system, high living costs, low wages. The flaw is NOT with inividual claimants, but that is what we are being told now.

Deny the existence of propaganda if you like, but this thread is proof that attitudes have changed, and not for the better.

Fairylea Sat 11-May-13 07:09:09

Completely agree wannabe.

I remember under labour the tagline for the adverts for tax credits was something like "it's what you're entitled to" for working hard in a low paid job. Now people are made to feel awful under the Tories.

If they were prepared to pay half of the childcare allowance to mums or dad's who want to stay home but struggle to doso then there would be more jobs out there and more nursery places for those mums who do want to work. Instead they are trying to force everyone back into work sooner and sooner and put up ratios for childcare at the detriment of the next generation.

CogitoErgoSometimes Sat 11-May-13 07:16:33

Claiming is not the issue and neither are the individual claimants. It's the amounts that are the issue. The newspaper articles that find families living in large homes in London at taxpayers' expense are admittedly using extreme examples to make a point but they only have an effect because it chimes with people's RL experiences closer to home.

When I ran the 'Entitled To' exercise for my friend I was a lone parent working FT, a graduate with 20 years' experience in my chosen field, financing mortgage, childcare and all the rest single-handed. Totting up all the benefits, I was amazed that our relative take-home pay/disposable income was not that far apart. That's not to say I don't think she should have made a claim or that she was in any way a 'scrounger' but it did make me question whether I'd done the right thing my whole life making sacrifices, getting a degree, working long hours and all the rest... just to be a few thousand better off at the end of the day.

Chubfuddler Sat 11-May-13 07:23:46

It would be extremely short term to limit ones earnings to receive tax credits. They dry up almost entirely once you no longer have dependent children.

CogitoErgoSometimes Sat 11-May-13 07:41:41

Well exactly. No-one in their right mind makes a life-plan based on benefits. But if, like my friend, you get used to a certain income level for the 18 years that she has a dependent child and, when it dries up, she's suddenly scrabbling to make up the lost income being I don't see that as a good thing either. She had the opportunity to complete a job-related qualification that would have resulted in higher pay but decided against it because it wouldn't have meant more total income once tax credits had been adjusted. I thought she should do the qualification anyway so that she was better placed long-term when maybe she'd want to go back FT but she disagreed.

Chubfuddler Sat 11-May-13 07:47:10

She's not very bright then. But it's quite clear that tax credits are principally aimed at ensuring families with children have an adequate income level whilst those children are dependent. If people don't want to think about the future that's up to them. My earnings Re increasing,my tax credits will quite rightly dry up as they do. But in twenty years I hope to be earning far more than I do now. Tax credits are helping me keep my career going in the short term for long term gain.

JakeBullet Sat 11-May-13 07:50:06

Very true chub, we need to be supporting parents once children are at school to increase their skills and gain work if that is wanted. We have a local organisation which offers courses for parents of school aged children...they are fun courses but are all about improving confidence and self esteem. Parents (mothers generally) enjoy them and there is support for job applications and CV writing too. I suspect that if they follow up some of these parents they would find an increase in employment among parents who have taken part in their courses.

I also think Tax Credits have come to be seen as a "Bad Thing" and that is wrong. If you have a degree and have a job which pays a living wage and don't need them then that is great. Why would you even want to question why you did that? I didn't get much in the way of tax credits for a very long time because I was able to work full time in a job which paid well. I would not ever have questioned that the girl up the road with three children was getting more of a tax credit than me....she didn't earn much and might not ever earn much. I have a professional qualification which I can use all my working life and will always pay well. Once my friend up the road has no dependent children then she will have very little. All the more reason to support her into some work once she is able to do so.

Fairylea Sat 11-May-13 07:52:07

"No one in their right mind makes a life plan based on benefits".

True but then can anyone really have a life plan anymore? I don't think having a career for life (yet alone a particular job) exists anymore unless it's something very very specific that few people actually achieve, such as law or medicine. Most people, even those in medium level positions, bumble from job to job depending on circumstances and availability.

It's a bit like taking out a mortgage isn't it (which we have)... it's a bit like taking a gamble for the next 15/25/30 years that you're going to be able to afford to live like that, dependent on economy and the governments policies and job availability.

Nothing is ever set in stone whatever you do.

CogitoErgoSometimes Sat 11-May-13 08:10:08

"Why would you even want to question why you did that?"

It did make me question it and that is the point... it's very out of character. My whole family, my whole life, has been characterised by a strong work ethic and the idea of paying your own way & not asking for anything. Old fashioned working class values. I assumed everyone else was similarly motivated and that benefits were only a last resort. Tax credits are really not in the class of last resort. I'm not about to reduce my hours or anything drastic - don't get me wrong - just wonder what happens to personal motivation when there are viable alternatives.

Tax credits werent started out in the ast resort category.

And a person can still have a work ethic and working class values, but find themselves in a low paid job.

Someone has to be the cleaner. Should that person be doomed to a life of poverty?

JakeBullet Sat 11-May-13 09:46:38

I think the thing is cogito that you are well qualified in whatever you do, you will continue to have a good income unlike the friend who might well not. When the dependent children are gone her income will be very poor, all the more reason for not leaving women on the scrapheap once their children start school.
I will admit to a pang on envy about the SAHM on benefits up the road who didn't have to put her child in nursery while she worked as I did. I think that says more about me though....how on earth could I envy the poor lifestyle she had? Of course, that one came back to bite me on the bum and now it's me as the single parent on benefits which is not all it's cracked up to be.
I agree about the work ethic but suspect if employers actually paid enough for people to live on then our benefits bill would be very small.

Cantbelieveitsnotbutter Sat 11-May-13 10:10:39

The only way they can sustain an 'income' from tc like that is for his company to make practically no profit until the kids leave school.
But that in itself causes problems with mortgages of even private rental, any sort of credit gain and will impact on the business's credit rating etc.
Not to mention it would be a massive headache to sustain.
If they make profit one year they will claim it back, I've seen people having to come up with thousands of pounds when NOTHING had changed at home other then the tax credits stopping, so they were £500 worse off every month at the same time as trying to find this money to pay back.

zazas Sat 11-May-13 14:17:37

Cantbelieveitsnotbutter - that you are right about re your credit etc. However my friend still feels that it is enough financial incentive at the moment for her not to work (she would only want to work a max of 12 hours a week), claim tax benefits and let her husband earn just enough to get by even though she could go back very part time at her relatively well paid medical job. She still finds it slightly unbelievable that she can do this but can't see why she shouldn't if the money is available to them?

morethanpotatoprints Sat 11-May-13 17:42:15

Lougle

In most cases it is only viable to work/ you are better off working than on tax credits is when you have no childcare to pay. Ok some childcare is subsidised but not all of it. So when you factor in the remaining childcare fees and maybe costs of getting to work, you are better off not working.

Pleasesleep Sat 11-May-13 18:21:48

The thing is is that the withdrawal rate is just stupidly stupidly high at the moment. It makes working more hours etc virtually pointless.

For example: you're offered overtime that pays 1000. From that you pay 30% tax and NI = 700. Then you lose 41% to tax credits = 420. Then you lose 61% to any housing benefit / council tax benefit you get so out of the 1000 you earned you get to keep 168. Not many people are going to work all those hours for 168 are they??! Those are are rounded figures but you get the jist!

morethanpotatoprints Sat 11-May-13 21:20:16

can'tbelieve

Your post isn't entirely correct as If he makes a profit they will be better off and could get more tax credit.
If he pays himself a small wage and his wife a small wage as say book keeper. They keep the remainder in the business, so this isn't treated as income. They as a couple are only receiving the same income as they were when he was the only employed one. However, now they are both employed by the company they receive more in tax credits as she will be entitled to WTC, or so I believe.

zazas Sat 11-May-13 23:17:18

morethanpotatoprints - I have been told about situation too - in fact I know a few couples that do that.

I have been thinking about my original question and reading through the replies I guess my thoughts were going along these lines when my friend was discussing what to do. She was saying to me: "My DH is not making much money in his work at the moment but I don't want to go back to work and don't want to put the 16 mo in childcare BUT if we keep his income low and claim tax credits etc then we are not so badly off, also means we can take 4 weeks holiday in July which I couldn't do if I go back to work. I know I could go back three days a week and DH could look after DS (her job is well paid) but if I can claim the tax credits, it makes sense to do so doesn't it?" So I say "I didn't know Tax Credits worked like that" (now I know they can!)

But reading between the lines I think she was either asking for me to agree and say "yes that is a great idea" (even if the tax credits probably didn't have her situation in mind when they were set up) or remind her that there was another way in - "But isn't it better for you to go back to your old job for a period until DH work picks up and he looks after DS for those days because you will be financially better off (as well as maintain your credit rating etc as they want to remortgage eventually) and at the end of the day tax credits aren't really designed to prop up income because you are choosing not to work when the reality is you can." In the end I didn't say anything as I was sure on what was the best advice to give - or that I have any advice for that matter!

So is the tax credit system great - designed to support a family who are in employment (working hard in a low paid job) and therefore helps to bring their income up to enable them to ‘afford’ to live?

Or is it flawed because it allows situations like this to develop where people can receive tax credits as a life style choice?

I am probably putting far too much thought into this but she will discuss this with me again and I know she wants me to say - just take the tax credits (and help her justify her decision) but she also values me as her sounding board and is no doubt waiting for me to discuss 'the elephant in the room' - that there is an alternative to tax credits - she could work!

Join the discussion

Join the discussion

Registering is free, easy, and means you can join in the discussion, get discounts, win prizes and lots more.

Register now