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The changeover from the Children’s Tax Credit (the old tax allowance) to Child Tax Credit will create a fool’s paradise for self-employed people. They will begin to receive the new Child Tax Credit from April 2003, but their income tax payments for July 2003, January 2004 and July 2004 will continue to be based on the tax rules for 2001/02 and 2002/03, when the Children’s Tax Credit was due. This relief will then be clawed back in January 2005, making the January 2005 tax payment £793.50 higher than in January 2004, assuming income and other circumstances are unchanged. The ‘worst case scenario’ would be if the ‘new baby’ rate of Children’s Tax Credit was claimed for 2002/03, as that would produce a clawback, in January 2005, of £1,573.50.

The one per cent increase in Class 4 National Insurance contributions will also first be paid with the January 2005 instalment – for example, if an individual earns £15,000 a year, this will increase the payment due by £155.77.