How tax credits are worked out

Tax credits are worked out by adding up all the elements which apply to you. You may be entitled to elements of Child Tax Credit, Working Tax Credit or both.

If you are on Income Support, income-related Employment and Support Allowance, income-based Jobseeker’s Allowance or Pension Credit, you will get the maximum Child Tax Credit for your circumstances. If you are not on any of these benefits, your tax credits depend on your income. Your initial award is always based on your income in the previous tax year, but it can be finalised or revised based on the current tax year, depending on what has happened to your income.

From April 2012, if you are eligible for Child Tax Credit only, you can earn £15,860 before the maximum award is reduced.  If you are eligible for (but not necessarily receiving) Working Tax Credit, on its own or with Child Tax Credit, the award starts being reduced once your income is more than £6,420 per year.  If you earn above the threshold that applies to you, you lose 41p of Tax Credits for every £1, so someone who is eligible for Working Tax Credit and had income of £6,421 in the tax year on which their award was  based, would get their maximum award less 41p.

When your tax credits are reduced, you lose the main elements of Working Tax Credit first, then the childcare element of Working Tax Credit, and finally child elements of Child Tax Credit .  Until April 2012, the family element of Child Tax Credit is not reduced unless you have income of over £40,000. This is called the second threshold. If your income is over £40,000, the family element usually starts to be reduced by 41p for every £1 above £40,000. This does not happen to every family, because some families with a large maximum award of tax credits will be left with more than the family element when the first threshold is applied. However, from April 2012, there is no second threshold and your tax credits, including the family element, carry on being reduced by all your income over £6,420 (or £15,860), so families on much lower incomes may end up with a nil award of tax credits.

The Revenue website has lots more information about how tax credits are worked out including a tool where you can answer a tax credit questionnaire to see how much you might get. The Turn2Us website also has a benefits checker which includes tax credits. The Direct Gov website has a tool called the benefits adviser which also covers tax credits.