Advantages

Certain stay-at-home spouses will now be able to have income in their own right of up to £4,000 (€5,079) and still qualify for the new £3,000 Home Carer's tax allowance, according to the Finance Bill.

The new measures mean that stay-at-home spouses caring for children, elderly or handicapped persons will now have to weigh up the financial advantages of taking the Home Carer's allowance against going to work outside the home and qualifying for the increased standard tax rate band. The standard rated £3,000 allowance is worth £660 to a taxpayer.

Carers with income of up to £4,999 can qualify for reduced allowances - the allowance is to be scaled back by £3 for every £1 of income over £4,000 (see table B). And the £3,000 allowance will be continued for the first tax year in which a carer takes employment outside the home.

But because the Home Carer's allowance and the increase in the standard-rate tax band for double-income couples are mutually exclusive, couples can choose whichever is the most beneficial to them in any particular tax year. That decision will depend on the level of income of the couple. Calculations show that where a couple's joint income is less than £31,000, with the low earner's income less than £4,000, then that couple would be better off opting for the home carer's allowance. But a couple with a joint income of less than £31,000, where the lower earner's income is more than £4,000, would be better off with the increased standard-rate allowance. And where the joint income is greater than £31,000 and the lower earner's income is greater than £4,000 the couple would be better with the increased standard-rate band.

These figures reflect the trade-off between the additional £3,000 allowance and the increase of up to £6,000 in the standard-rate band.

Mr McCreevy is to continue with his controversial plans to individualise the tax system over the next two Budgets. He is aiming to "arrive at a situation where over 80 per cent of taxpayers will be taxed at the standard rate". But he declined to say if the Home Carer's allowance would be increased in line with increases in the standard-rate band for double-income couples.

As set out in the Budget the income band which qualifies for tax at the new 22 per cent standard rate will increase by £3,000 to £17,000 for a single person. For a married couple with one income the standard-rate income band is unchanged at £28,000. But under the tax individualisation plan, up to £34,000, or an additional £6,000 of the income, of a double-income married couple will now be taxed at the standard rate. This will mean an additional saving of up to £660 for a double-income married couple compared with a single-income couple on the same income in the next tax year.

The £3,000 allowance was announced last December as a response to the sharp criticism of the individualisation proposals that were seen as discriminating against stay-at-home spouses. Under the present income-tax system the standard-rate tax bands are £14,000 for a single person and £28,000 for a married couple regardless of whether they have one or two incomes. Under the Finance Bill proposals, the standard-rate band for a single person will rise to £17,000, but the treatment of married couples will vary according to whether they have one or two incomes.

In the next tax year 2000/2001 the standard-rate band for married couples with two incomes will rise by £6,000 to £34,000. Because this £6,000 is not transferable between the spouses, only double-income couples where the second spouse has income of more than £6,000 will get the full value of the new individualisation measures. For example the maximum standard-rate band for a couple with a total income of £40,000 split between one income of £36,000 and the other of £4,000 would be £32,000. But a couple earning £40,000, but split into two incomes of £20,000 each would qualify for the maximum standard-rate band of £34,000. (see table A)

Table B

Home Carer's Standard Income Rated

Allowance £4,000 £3,000 £4,100 £2,700 £4,200 £2,400 £4,500 £1,500 £4,700 £900 £4,900 £300 £5,000 Nil