Brown to squeeze middle classes

GORDON BROWN is to hit more than a million middle class families in the pocket with a reform of the children's tax credit, it has emerged. Middle-income earners such as nurses, police officers and teachers are among those who will lose out under the overhaul.

The full impact of the Chancellor's planned shake-up is revealed in figures supplied by the Treasury. They show that 900,000 couples currently receiving up to £520 a year through the Children's Tax Credit will no longer qualify. A further 500,000 will see big cuts in the amount they receive.

Brown introduced the tax credit for families earlier this year to replace the Married Couple's Allowance. Now he proposes to launch a new Integrated Child Credit in 2003 which will squeeze those on middle incomes. Tax credits are a pivotal part of his continuing crusade to 'make work pay'. Instead of handing out benefit cheques, people are given tax cuts through their wages.

However, hidden away in the small print of the latest reforms to the complex system is a crucial alteration to the rules deciding which families will be eligible for the children's credit. To calculate those qualifying for the allowance, a couple's incomes have been treated separately. As a result, families where neither parent earns more than £33,985 a year receive the full £520 credit. Payments taper off for salaries above the threshold, and cease once one parent earns more than £41,735 a year.

Under the new Integrated Child Credit, however, the Treasury will base its calculations on a couple's joint income. Currently, a family where each parent earns £21,000 a year receives the full tax credit because neither breaches the £33,985 threshold. But they will receive nothing under the new system because their joint income of £42,000 is just above the £41,735 cut-off figure.

The disclosure is certain to alarm Downing Street, which will fear a backlash from middleclass voters struggling to make ends meet in the increasingly uncertain economic climate. Brown has already faced criticism over his introduction of the children's credit to replace the Married Couple's Allowance, which was paid to ten million couples. Only five million couples are eligible for the tax credit - a reduction believed to save the Treasury £440m a year. When the the Integrated Tax Credit is introduced in 2003 that figure will fall to around 3.5m families, saving the Chancellor even more money.

The changes were attacked by Liberal Democrat social security spokesman Steve Webb. He asked the Treasury for the figures on the number of families who would lose out under the new proposals four months ago, but received an answer only last week.

'The Children's Tax Credit was supposed to compensate people for the loss of the Married Couple's Allowance,' said Webb. 'But we now find that hundreds of thousands of hard-working parents will have the tax credit taken away from them in two years' time.'

He added: 'If you are going to give people a tax break worth just over £500 a year, that's fine. 'But it seems crazy to take it away from them again a couple of years later. 'Families need some kind of stability in their budget so they can pay the mortgage and the monthly bills. It's not acceptable to scrap an allowance one year, replace it with a tax credit the next and then take that away from families two years later.'

The row comes as Brown prepares his pre-Budget report, which he will unveil in the Commons next week. The Chancellor has signalled that he will use the report to hand out more tax cuts to small businesses and more generous tax breaks for share options.