HC Deb 01 May 2002 vol 384 cc881-2W
Mr. Willetts

To ask the Chancellor of the Exchequer with reference to table 4.4 on page 79 of the 2002 Budget Red Book, if he will provide figures for each column in respect of marginal deduction rates(a) over 50 per cent. and (b) over 40 per cent. [51656]

Dawn Primarolo

[holding answer 22 April 2002]: The table shows estimates of the number of families facing marginal deduction rates (MDRs) in excess of 40 per cent.

Number of households facing MDRs of 40 per cent. and 50 per cent. (cumulative)
Marginal deduction rate Before Budget 1998 2002–03 system of tax and benefits After introduction of NTCs
Over 100 per cent. 5,000 0 0
Over 90 per cent. 130,000 45,000 45,000
Over 80 per cent. 300,000 210,000 200,000
Over 70 per cent. 740,000 255,000 260,000
Over 60 per cent. 760,000 940,000 1,450,000
Over 50 per cent. 760,000 1,140,000 1,600,000
Number of households facing MDRs of 40 per cent. and 50 per cent. (cumulative)
Marginal deduction rate Before Budget 1998 2002–03 system of tax and benefits After introduction of NTCs
Over 40 per cent. 800,000 1,180,000 1,775,000

This analysis does not take into account the way in which the new tax credits will respond to rises in income, described in detail in "The Child and Working Tax Credit". The new tax credits respond only to rises in income in the current year of more than £2,500, disregarding the first £2,500 of any rise. This means that recipients will not see their tax credits reduced as soon as their income rises, so reducing the effective marginal deduction in any one year. The figures in the table, which cover the number of households in receipt of either income related benefits or the working families tax credit (WFTC) or new tax credits from April 2003, where at least one person works 16 hours or more, include the effects of income tax and national insurance contributions, and the withdrawal of housing benefit and council tax benefit.

The effect of tax and benefit changes introduced since Budget 1998, including the WFTC, reduced the number of households facing MDRs in excess of 70 per cent. by around half a million. As WFTC is more generous than the family credit that it replaced, more households benefit from it, hence the larger numbers facing MDRs over 40 and 50 per cent. in 2002–03.

Building on the success of WFTC, the Government will be introducing a new system of tax credits from April 2003. As the new tax credits will be more generous and inclusive than the current system of support, more households will be eligible, and those currently eligible will gain more, hence a greater number will face MDRs over 40 and 50 per cent. from 2003–04.