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An Overview of Tax Credits

If you are working and have a low income or if you have children (in which case you do not need to be working and can have a fairly substantial income), you may be eligible for tax credits.

Working tax credit (WTC) and child tax credit (CTC) are – despite their names – state benefits, not tax allowances. However, the amount you can get depends broadly on your gross income for tax purposes (or joint income if you are married, in a civil partnership or living with someone). This means that measures which save you tax might increase your tax credits too. And don’t assume these are benefits just for the poor. If you have children, you might qualify even with an income well over £60,000 a year.

Tax credits if you have no children

You may be able to claim WTC if you or your partner are in work but on a low income. You must either be: aged 25 or more and working at least 30 hours a week; 16 or more, working at least 16 hours and disabled; or aged 50 or more and have recently started work after a period claiming certain state benefits. You are unlikely to be eligible in 2010–11 if your income comes to more than £13,369 a year (single) or £18,215 (couple) – unless you are entitled to the extra credits available to people with a disability or some over-50s.

Tax credits if you have children

You may be eligible for both the credits or just the CTC. For 2010–11, you can get at least some CTC provided your household income does not exceed £58,175 (or £66,350 if you have a child under one).

How the credits work

WTC is made up of eight elements – see the table overleaf. Your claim is based on as many of these elements as apply to you and you add on the relevant individual element of CTC for each child you look after. However, for every £1 by which your income exceeds the first threshold (£6,420 in 2010–11), the credits are reduced by 39p. WTC is reduced first with the childcare element being the last to go, then the CTC.

If you qualify only for CTC and no WTC, the first threshold at which you start to lose the individual elements of CTC is higher (£16,190 in 2010–11).

Every household with children also qualifies for the family element of CTC. This is not reduced at all until the household income reaches the second threshold (£50,000 in 2010–11). You then lose £1 of credit for every £15 of income over the threshold.

Rate of tax credits in 2010–11

Working Tax CreditWho qualifies (1)Amount
BasicEveryone eligible for WTC£1,920
Lone parentSingle, caring for a child£1,890
Second adultMost couples£1,890
30-hourWorking at least 30 hours a week£790
Disabled workerSatisfy range of disability conditions£2,570
Severe disabilityEligible for highest rate of disability benefit£1,095
50-plusAged 50 or more and returning to work. (Higher rate applies if work at least 30 hours a week.)£1,320 (or £1,965)
ChildcareIncurring eligible childcare costs80% of eligible costs (2)
Child Tax Credit
Who qualifies(1)Amount
Individual elementFor each child in your care£2,300 (3)
Family elementFirst year following new birth£1,090
Family elementFamilies without a newborn child£545

(1) The rules are complicated and just a brief indication is given here.

(2) Eligible costs are up to £175 a week for one child and £300 a week for two or more.

(3) Increased to £5,015 or £6,110 for a disabled child depending on severity of disability.

Income on which your tax credits are based

The amount of tax credits you get for any year is based on your income for that same year. However, because there is a delay before you know your income for the year, your claim is initially based on your income for the previous tax year. So, for the 2010–11 tax year, your credits are based initially on your income for 2009–10 and then revised after 5 April 2011 when your actual income for 2010–11 is known.

If it turns out that your income was lower than initially estimated, you will have received too little in tax credits and should receive an extra sum after the end of the year. Conversely, if it turns out that your actual income was higher than the estimate, you will have received too much in tax credits and the excess may be clawed back. But increases in income up to £25,000 are disregarded. You are required to report some changes in your circumstances during the year instead of waiting for the end-of-year review. Where a change would increase the tax credits you can claim (for example, a fall in income or rise in childcare costs), it makes sense to report the change and get an adjustment straight away rather than waiting for the year-end.

Between April and July 2009, you will receive an annual review form (TC603R) to finalise your award for 2009–10. You are asked either to confirm the details on the form or to notify any changes by 31 July 2010. If you still do not know your income for last year, give a provisional figure and then supply the exact figure once known but no later than 31 January 2011.

Broadly, credits are based on your income for tax purposes, but there are differences. For example, some fringe benefits, such as cheap loans, are ignored, as is the first £300 of income from savings and pensions. Deduct any amounts paid to a pension arrangement or under Gift Aid but ignore the Gift Aid carry back rules (p. 234) and deduct only what you actually paid during the year. Business losses are taken into account in the year in which they arise and, unlike the tax rules, are set against the income of the couple in a joint tax credit claim. Losses not used in this way may be carried forward for tax credit purposes, regardless of the way they have been claimed for tax.

How to claim

Tax credits are not paid automatically – you must claim them. You make a single claim for both credits by phoning the Tax Credits Helpline (0845 300 3900). Claims can be backdated no more than three months, so you need to send in a new claim by 5 July to get credits for the full tax year.

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