Tax Credit & Means
Income and means are considered for both Working Tax Credit and Child Tax Credit. Individuals receiving Income Support, Income-based Jobseeker’s Allowance, and certain disability payments will receive the maximum Tax Credits while entitled to those benefits.
The income is averaged pro-rata throughout the year. In most cases, reference is made to the previous year’s income based on the tax year.
Where there has been an increase or decrease within certain limits relative to the previous year’s income, the current year’s income is used. There is an obligation to notify changes in income.
Income includes actual earnings from employment, self-employment, certain taxable Social Security benefits, income from pensions, income from capital, notional income, and miscellaneous other income.
Pension income from state and occupational pensions, together with other passive income, is first aggregated. Investment income includes income from investments with certain exclusions such as PEP and savings accounts, TESSA income attracting tax relief, certain income from compensation (especially personal injury damages), income from savings and tax certificates, and £70 per annum on deposits with national savings and investment.
Property income is fully included.
A person may be deemed to have deprived himself of means for the purpose of securing increased entitlement. This is added back.
The above sources of income are aggregated for the person or, where appropriate, the partner, and the first £300 is disregarded.
Earnings, Social Security income, trading income, and miscellaneous income are aggregated. Deductions for payments to pension schemes are permitted. Earnings include statutory sick pay, maternity pay, etc.
A range of deductions and provisions applicable to income tax generally apply, including certain earnings, expenses, payments, and allowances.
Some Social Security income is included, while others are excluded, including certain Income-based Benefits, Income Support, and Child Benefit.
Income from the above two steps is added, and certain income is disregarded.
A range of miscellaneous income is disregarded, including certain payments in connection with employment and schemes, education and maintenance allowance, foster care payments within certain bands, certain expenses paid by various departments under various social schemes, payments made to approved personal and occupational pension schemes, and rental income up to £4250 per annum for renting a furnished room.
The next step looks at the income thresholds. In 2014, the threshold was £6420 for a person entitled to WTC and £15,910 for those entitled to CTC only. The maximum Tax Credit is available for those below the threshold income.
Income is compared with the threshold. If the income exceeds the threshold, the excess is reduced by 41%. This reduction applies to Working Tax Credit but not the maximum CTC childcare element or family element. At this point in the calculation, if the reduction is more than the maximum WTC, the childcare element is reduced by the remaining income. If the reduction is more than the maximum Working Tax Credit and the childcare element, the maximum CTC is reduced by the remaining income.
The family element is then reduced by £1 for every £245 lessened.
The entitlement to the tax credits is as follows: if the reduction is less than the maximum WTC, it is the amount remaining after the reduction of the WTC plus the childcare element, if any, plus the maximum CTC cost of the family element. If the reduction amount is less than the maximum WTC and childcare element, if any, it is the amount remaining after the reduction of the maximum WTC and childcare element plus the maximum CTC plus the family element.
If the reduction element is less than the maximum WTC, the childcare element, and the maximum CTC, then it is the amount remaining after the reduction of the maximum CTC plus the family element.
No entitlement to Working Tax Credit is computed as follows: The maximum Child Tax Credit is calculated, income is calculated, entitled, and is based on a comparison of the income to the threshold amount.
The maximum Child Tax Credit involves several elements added together:
- Family element, which may be an addition for a child or children under 12 months.
- Child element for each dependent child.
- Disability element for a child who receives DLA or is registered blind.
- Severe disability element for each child who registers with the highest care rate component.