Tax Credits

Tax credits are governed by the UK Tax Credit Act 2002 and regulations made under it. The credits are not linked to tax liability, although they are administered by HMRC.

Child tax credit is payable to a person, whether employed or not, who satisfies a means test and is looking after a child or qualifying ill person. The persons must be ordinarily resident in the UK and not subject to immigration control.

The conditions for working tax credit are similar, provided that the person must be in full-time paid employment. This means working at least 16 hours a week with responsibility for one child or qualifying young person. P

ersons working at least 16 hours a week with a physical or mental disability that puts them at a disadvantage in obtaining employment and who are qualified for the disability element. Persons over 25 working at least 30 hours a week. Persons or partners over 50 working at least 16 hours a week to qualify for the 50 plus element.

The tax credit rate depends on a range of factors, including available elements to the claimant, income, annual threshold, and annual amount.

In order to qualify, the income in the previous tax year is used. If the current year tax income is lower, it may be used instead. Income from all sources is taken into account, including taxable social security benefits, gross earnings less pension contributions, taxable profits, and taxable social security benefits for persons under retirement age. Income from property investments is included but disregarded if it is less than £300.

The claimant must be responsible for a dependent child or qualifying young person, with the same definitions as applied in respect of child benefit. The child must normally be living with them. Where a child is living in two households, HMRC will resolve the conflict.

The benefit has a family element, being £1,190 for a child under one and £545 in other cases. The above family element applies once and after a child.

The individual element per child is £1,765 per annum. Where a child is disabled or severely disabled, this increases considerably.

The working tax credit has several elements and applies to persons.Claimants who are entitled to income support or income-based jobseeker’s allowance will receive the maximum child credit, consisting of the family and child element. If the claimant is not receiving the above, their income is compared to an income threshold.

If the claimant is also entitled to working tax credit, the threshold is £5,220. Where the claimant is not entitled to working tax credit, it is £14,155. If the income is the same or less than the income threshold, the maximum child tax credit is payable. Where the income exceeds the income threshold, the maximum child tax credit is tapered by 37 percent of the excess income.

Working tax credit applies to persons over 16 in a qualifying community of employment with sufficiently low income not subject to income control or to meet residence requirements.

The person must undertake at least 60 hours a week, 16 hours per week if there is a child or qualifying young person for whom they or their partner is responsible, or if they have a physical or mental disability that puts them at a disadvantage in employment. Alternatively, the person must satisfy conditions in relation to the 50 plus element or be aged at least 25 and undertake at least 30 hours per week in any other case. Work must be expected to last at least four weeks and must be made in exception of employment, remunerative employment.

If the claimant satisfies the above conditions, they are entitled to a basic element of £4,665. They may be entitled to a disability element if they undertake remunerative work of at least 16 hours per week and have any of certain listed disabilities.

A couple element is payable to persons who make a joint claim, a lone parent element is payable to a lone parent. Persons qualifying for the 30-hour element include single claimants working 30 hours a week or more, couples with either working 30 hours, and couples responsible for a child, or both are working, and joint hours exceed 30.

If the child is there, there is a further childcare element, being 80 percent of childcare costs up to £175 for one child or £300 for two or more children per week.

The childcare element is only payable to lone parents, couples where both are working, and couples where one partner is working and the other is incapacitated in hospital or prison. Childcare must be undertaken with relevant childcare providers, registered childminders, nurseries. It does not apply to childcare provided by relatives.

The maximum tax credits or working tax credit or child tax credit apply.Claims for both tax credits are made on the same form to HMRC. HMRC estimates the tax credit and notifies provisional entitlements.

At the end of the year, tax year claimants receive a final decision on entitlement based on actual income and circumstances. Claimants who have been underpaid receive a lump sum, and claimants who have been overpaid have recoverable sums. The sums are entitlements are weekly entitlements.

Claims and changes in circumstances must be reported to HMRC within three months. This would include ceasing to be single, protection and childcare costs, ceasing to work, not having set hours, or no longer being responsible for a child.

The rate of each element is as follows: Basic element £1,665, disability element £2,225, 30-hour element £680, second adult £1,640, lone parent element £1,640, severe disability element £940, 50 plus element £1,140 if the claimant works between 16 and 30 hours.

The maximum credit is only paid if the claimant’s income does not exceed the threshold.

Claimants may be entitled to both elements, and different elements are tapered. There are complex rules in relation to tapering.

With working tax credit, to calculate the maximum working tax credit, calculate income comparing work threshold. If the income is less than the threshold, the maximum working tax credit is payable. If it is more than the threshold, it is tapered by 37 percent of the excess. The child tax credit is effectively available to persons looking after children. Where a person looks after children and does not work, they would be entitled to the child tax credit only. This comprises a family element, an element for a child, and a disabled element.

The working tax credit is available to persons who work more than 30 hours a week or under conditions mentioned below. Persons working less than that receive a basic element, a 30-hour element, a second adult element, and various disability elements. In most cases, benefits income counts, with certain exceptions in respect of certain benefits.

Where the income is less than the threshold, the full tax credit is payable. Above the threshold, the maximum credit is reduced by 37 percent of the excess. This will eventually cause the credit to taper out.

A person may be entitled to both child tax credit and working tax credit. The principal effect of both credits is available, but the income threshold is reduced, and there is an allowance of 80 percent of arm’s-length childcare costs. Childcare costs must be incurred with registered providers. Child benefit is ignored.

Child tax credit does not apply or count as income when calculating income support, income-based jobseeker’s allowance, or pension credit. It does count as income in calculating housing benefit and rates benefit (council benefit).

Payments of childcare tax credit are usually paid weekly or monthly directly to a bank or post office. It is paid to the child’s main carer. Payments of working tax credits are usually paid monthly or weekly to a bank or building society or post office. The childcare element may be paid to the main carer.