Tax Credits
The Tax Credit System comprises two elements: Child Tax Credits and Working Tax Credits. Child Tax Credit is a means-tested payment for families with children under 16 or under 20 in relevant education. It is not dependent on employment. Students may qualify.
Working Tax Credit is a means-tested payment for lone parents or persons with disabilities who work more than 16 hours a week. It is also available to couples whose joint working hours are more than 24 hours a week, and single people and couples without children over 25 who work more than 30 hours a week.
The scheme is administered by HMRC.
Working Tax Credits
Working Tax Credit does not require national insurance contributions.
The Tax Credit claim is made jointly by members of a couple, whether married, civil partners, or living together.
The applicant must be over 16, living or working in the United Kingdom, not subject to immigration control, and must be in remunerative work—30 hours a week if aged 25 or over, or 16 hours a week with a disability or disadvantage in obtaining employment. Additionally, they should be over 60 or a lone parent, or working 24 hours a week or more if either the applicant or partner has a child or a qualifying young person for whom they are responsible. The joint hours for couples must be 24, with both the applicant and partner working at least 16 hours a week.
The remunerative work must be expected to continue for at least four weeks after the claim date. The person may be employed or self-employed and can have more than one job.
The work must not be voluntary, with no expectation of payment involved. To qualify, the person must meet the required number of hours on an ongoing basis and notify HMRC of any changes in working hours.
Remunerative work is deemed to continue during periods of sickness, ordinary maternity leave, paternity leave, adoption leave from employment or self-employment, or during holiday periods. A person is deemed in remunerative work for the first 13 weeks of additional adoption or maternity leave provided they worked 68 hours during the period before the initial ordinary maternity or adoption leave commenced.
A person is considered disadvantaged in obtaining a job if they have certain qualifying disabilities and are receiving disability, incapacity, or disablement-related welfare claims. Generally, the support must be received for 26 weeks before the claim.
Working Tax Credit comprises several elements, each with an annual amount and associated daily amount attached: Adult element, second adult element, lone parent element, disabled worker elements, a 30-hour element, and a severe disability element. Each of these provides fixed sums or allowances.
The childcare element covers 70% of weekly charges up to a maximum cap, tapered per child.
The credit is assessed based on one’s personal circumstances relevant to the various elements.
The lone parent element is payable to a single person responsible for a child or qualifying young person. The 30-hour element is available to someone working at least 30 hours a week or, in a joint claim, where at least one partner is working 30 hours per week, and one is responsible for a child or young person.
Further details regarding the manner in which working tax credit functions are provided below. It is not a standalone payment but rather a minimum provision or allowance to top up other income, whether social welfare or earned.
Child Tax Credit is available to individuals or couples aged 16 or over with sufficiently low income who are responsible for a child or young person resident, ordinarily resident, or having a legal right to reside in the UK. Individuals residing in the Republic of Ireland and working in Northern Ireland will generally satisfy this test. Persons exercising EU rights to take up employment will also generally qualify.
An individual must be responsible for at least one child or qualifying young person. A qualifying person is between 16 and 20 years old in full-time education but not in advanced education or pursuing a degree, or who is registered for work or training with the DEL.
A person under 18 who has ceased full-time education remains qualified for 20 weeks. Full-time education requires studying more than 12 hours a week. A person may not be considered a child or qualifying child if they receive certain benefits in their own right.
Responsibility for a child or qualifying young person is determined by their usual residence. If the child lives in multiple households, only one person may be deemed responsible, usually the one with the principal responsibility. HMRC determines this matter.
There are five elements to the Child Tax Credit: a family element, child element, disabled child addition, and severely disabled child addition. The child element is a flat rate per child.
The Family Element
The family element is available to families with a child or young person and an income of less than £26,000, or £32,200 for families with two or more children. These amounts may increase depending on specific circumstances, such as having a child with a disability.
The child element is paid per child or qualifying young person. The disabled child element is payable for children receiving DLA or registered as blind. The severely disabled child element is paid for children entitled to DLA or registered with a high care component.
Tax Credits are calculated similarly for both Child Tax Credit and Working Tax Credit. The maximum Tax Credits for the period are determined, which is the sum of Child Tax Credit elements (excluding the family element) and the maximum elements of Working Tax Credits (excluding the childcare element).
The childcare element covers 70% of eligible childcare costs up to a maximum, depending on the number of children and tapering downwards. It applies to eligible children in paid childcare. To qualify, a person must be responsible for at least one child and meet specific criteria regarding work and care circumstances.
Children must qualify until the September following their 15th birthday or 16th birthday for a disabled child.
Eligible childcare providers include registered childminders, care providers, schools, or establishments exempted from registration, along with various other approved schools run by, for example, a school or local healthcare trust, Education or Library Board, foster parent, or carer providing childcare for someone other than their foster child.
The scheme includes non-registered childminders in the child’s home approved by health and social services trust. They must be over 18, hold childcare qualifications or have attended an approved course, possess a first aid certificate, and not be considered unsuitable for working with children.
The childcare element may be recalculated if childcare costs change by more than £10 a week for four consecutive weeks.
The income is calculated similarly to Working Tax Credit. The threshold for those who claim CTC only is £15,910 for the year 2013-2014. If the income is less than the threshold amount, the maximum CTC plus the family element is paid.
If it exceeds the maximum amount, 41% of the difference is deducted. The entitlement to CTC is calculated by taking the reduced amount away from the maximum CTC. The amount is the difference plus the family element.
Tax credits must be claimed in writing on an approved form. They may be backdated for up to 31 days. Married couples, civil partners, couples living together, and same-sex couples living together must make a joint claim. Full disclosure of information is required.
HMRC makes an initial decision based on the claim and previous year’s income. Changes in circumstances that the claimant is bound to report are specified.
The decision is reviewed when there is a change of circumstances relevant to the award. The decision may also be reviewed if there is a reasonable belief that the award is incorrect, whether in favor of HMRC or otherwise. At the end of each year, a final notice is sent to each person who has been awarded tax credits.
The annual final notice gives details of the tax credit award, initial and revised decisions for the past tax year. The person is asked to confirm that income for the tax year will be within the specified range. A person must notify HMRC of any changes.
An annual declaration form seeks details of each person’s income or an estimate. A declaration must be signed, constituting the claim for the following year.
The annual declaration made by either member of a couple may be treated as a renewal. Upon return of the final notice, the final decision may be made on entitlement for the just-ended year, including confirmation of the initial decision and details of any over or underpayment.