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Tax credits are administered by HMRC and have nothing to do with the tax system and are not connected with how much tax you pay, although overpayments of tax credits are collected as if they were tax due.
The general rule is that to qualify for tax credits you must be aged 16 or over and usually live in the UK.
To receive your entitlement to tax credits, you need to claim them using a paper form TC600. If you don’t already have a claim pack you can get one by telephoning 0345 300 3900.
Couples (a man and woman, or 2 men or 2 women living together as a couple whether married or in a civil partnership or not) must claim tax credits jointly, and entitlement will be based on the combined income of both partners. It is planned that both these tax credits will eventually be replaced by Universal credit.
Child tax credit (CTC) can be claimed by families with at least 1 child. The amount of income you can have as a couple and still receive CTC will depend on the particular family circumstances. Broadly speaking, a couple with 1 child where there is at least 1 full-time working parent will receive CTC for income of up to £26,170.
It provides support for:
- Children until 1 September after their 16th birthday
- Children aged 16 to 18 who are in full-time, ‘non-advanced’ education (i.e. studying for at least 12 hours a week and the course leads to A level, NVQ level 3, or below)
- Children aged 16 to 18 who have left full-time education but don’t have a job or training place and have registered with the careers service or Connexions service, and are not claiming income support or tax credits in their own right.
The amount of benefit is dependent on the number of children in the family, whether they have disabilities, and the total family income. It will be paid direct to the person who cares for the children.
CTC is made up of the following elements: A family element that is payable to any family responsible for a child. A child element for each child the family is responsible for. This is paid at a higher rate if the child has a disability and at an enhanced rate for a child with a severe disability.
CTC will be paid directly through a bank account to the person who is mainly responsible for caring for the children in the family, either weekly or every 4 weeks.
The following table shows the range of amounts receivable:
|Annual amounts receivable|
|Gross annual joint income||One child||Two children||Three children|
Families with children are still able to claim child benefit, which is unaffected by, and continues to be paid separately from, tax credits.
However, child benefit can be clawed back from a family where a partner or spouse has income in excess of £50,000. No child benefit is available to a household in which a partner or spouse has income of more than £60,000.
Working tax credit (WTC) is a tax credit for people in paid work who are on a relatively low income (for couples, joint income), including those with a disability It also includes support for the cost of eligible childcare.
WTC is for people who are employed or self-employed (either on their own or in partnership) who:
- usually work 24 hours or more a week
- are paid for that work, and
- expect to work for at least 4 weeks.
And for those who are either:
- 16 or over and responsible for at least one child
- aged 16 or over and disabled, or
- aged 25 or over and usually work at least 30 hours a week.
There are some exceptions for a couple where one is disabled or a full-time carer, allowing fewer hours to qualify for WTC.
WTC includes a basic element and a range of extra elements (see the table below).
WTC is paid to the person who is working 16 or more hours a week. Claims are paid directly into employees’ bank, building society or Post Office card accounts. Couples where both work 16 hours or more a week may choose which of them will receive it.
Claimants will receive their payments directly from HMRC. The childcare element of WTC will always be paid direct to the person who is mainly responsible for caring for the child or children, alongside payments of CTC.
Tax credit awards are based initially on income for the previous year. At the end of the tax year, when income for the year is known, the tax credits position is finalised. Any increase in income will be ignored to the extent of £2,500 but income above this limit will result in a reassessment, with additional payments made to top up the original award, or repayments due from those who have been overpaid. The first £2,500 of reduction in income is also disregarded in adjusting the award after the end of the year.
During the year:
- If income rises significantly, you should tell HMRC so the award can be adjusted. Otherwise, you may receive too much tax credit and have to pay it back when the award is finalised at the end of the year.
- If income falls, you can ask to have your tax credits paid on the basis of an estimate of your income for the year. But if you do that, you will have to tell HMRC straight away if you think your income will be higher than your estimate.
- Any relevant change in circumstances must be notified to HMRC within one month. Claims will be adjusted to reflect any change in circumstances.
Income is broadly aligned with the claimant’s gross taxable income (i.e. before the deduction of income tax and national insurance contributions).
Earnings will be taken from P60 certificates for employees and self-assessment returns for self-employed claimants. There are, however, exceptions to the alignment, including:
- Not all benefits in kind are included
- The first £100 per week of statutory maternity pay (and their new equivalents) does not count
- Apart from earnings and taxable social security benefits, most other annual income is taken into account only to the extent it exceeds £300
- Contributions to approved pension schemes and payments under the Gift Aid scheme are deducted (gross amount).
It is very important to understand that tax credits cannot be backdated for more than a month. Please ask us for further information regarding failing deadlines.
|Working tax credit 1||Per year|
|Additional couple’s and lone parent element||£2,010|
|30-hour element 2||£810|
|Disabled worker element||£3,090|
|Severe disability element||£1,330|
|Childcare element||Per week|
|– maximum eligible cost||£300|
|– maximum eligible cost for 1 child||£175|
|– percentage of eligible costs covered||70%|
- The elements for which claimants are eligible can be added together to arrive at the maximum amount of tax credit available.
- For those over 60 and over this reduces to 16 hours.
|Child Tax Credit||Per year|
|Disabled child element||£3,275|
|Severely disabled child element||£4,600|
As well as the family element, a family will be entitled to a child element for each child for whom it has responsibility. For each child, the child elements which are appropriate may be added together to arrive at the maximum amount available for that child.
|Common features||Per year|
|First threshold for those entitled to Child Tax Credit only||£16,105|
|Income disregard – increases or reductions in income||£2,500|
Those with income below the withdrawal threshold will be paid the full amount of tax credits available for their circumstances. Those with income over the threshold will have their maximum tax credit award tapered away by 41p for every excess £1 of gross income. Claimants eligible for both WTC and CTC will have their maximum awards reduced in the order:
- WTC apart from childcare
- The childcare element of WTC
- CTC apart from the family element
- CTC family element.
A couple with 2 children where both parents work at least 24 hours per week, paying £300 a week on childcare:
|Working Tax Credit||– Basic element||1,960|
|– Second adult element||2,010|
|– 30-hour element||810|
|– Childcare element (300 x 70% x 52)||10,920||15,700|
|Child tax credit||– Child element (2,780 x 2)||5,560|
|– Family element||545||6,105|
The maximum award is payable until family income reaches £6,420.
For income over this threshold, there is a taper of 41p for each additional £1 of income, so that, for example, the WTC basic element will be lost when income reaches:
£6,420 plus (£1,960 divided by 100/41) = £11,200
The following table shows the effect of these principles in setting income levels where the various elements are lost:
|Reduction||Net award||Income band||Amassed income|
|WTC – basic||£1,960||£19,845||£4,780||£11,200 (see above)|
|WTC – second adult||£2,010||£17,835||£4,920||£16,102|
|WTC – 30-hour||£810||£17,025||£1,975||£18,077|
|WTC – childcare||£10,920||£6,105||£26,634||£44,711|
|CTC – child||£5,560||£545||£13,560||£58,271|
|CTC – family||£545||Nil||£1,329||£59,600 (see above)|
Child benefit is clawed back from a household in which a spouse or civil partner has net adjusted income of more than £50,000. The withdrawal rate is a percentage of the child benefit due, and works so that when the net adjusted income reaches £60,000, no child benefit is received.
The additional charge is collected through the tax system and is known as the high income child benefit charge. To minimise the administration of the charge, households where no child benefit would be due can opt not to receive the child benefit. In most households it is the child’s mother that would make the election.
Net adjusted income is total income less the gross amount of pension contributions and the gross gift aid payments, and when there are several children in the household this makes the payment of pension contributions very tax efficient for someone with income marginally above £60,000.
Persons who newly arrive in the UK are required to satisfy a 3-month residence qualification before they can claim child tax credit.
- EU citizens and their family members
- persons temporarily absent from the UK
- those paying class 1 or class 2 NICs under certain circumstances
- where the person has refugee status or has been granted humanitarian protection.