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How income affects tax credits

Reporting your income for tax credits

Your tax credit award is initially based on last tax year’s income, and then usually adjusted at the end of the tax year. Tax years run from 6 April to the following 5 April inclusive. You can ask for tax credits to be adjusted before the end of the tax year, based on an estimate of the current tax year’s income, if you know it is going to be much lower, or it is going to go up significantly.

It is important to tell the Tax Credit Office if your income is going to be over £2,500 more in the current tax year than it was in the previous tax year. Remember that if you were on maternity leave in the previous tax year and you have returned to work, this could easily happen. It’s a very good idea to tell the Tax Credit Office what you expect your income to be in the current tax year, if you know it is going to be higher, so that you avoid being overpaid.

If your income has gone down, for example, because you are on maternity leave in the current tax year, you may want to give the Tax Credit Office an estimate of income in the current tax year so that you get more tax credits. Your income will need to decrease by more than £2,500 compared to the previous tax year. Remember however that if you end up with more income than you tell them, you could be overpaid (for example, if you go back to work earlier than expected or go back to work full-time rather than part-time).

Tax credits are always based on joint income, so if you live with a partner, you need to think about changes to both your incomes to see if your joint income has gone up by more than £2,500 compared to the previous tax year, or down by more than £2,500.

Unlike most other benefits, tax credits use gross income to calculate your entitlement. This means income before deductions such as tax and national insurance.  As a general rule only taxable income (including some benefits) is counted and capital is ignored completely.  Some income can be disregarded, for example the first £100 a week of Statutory Maternity Pay, Statutory Shared Parental PayStatutory Adoption Pay or Statutory Paternity Pay and contributions you pay to a pension scheme. Maternity Allowance is also completely ignored.

There is more information on the income you need to report on GOV.UK, and you can also read the notes which come with your claim form. Ring the tax credit helpline if you are not sure.

What happens at the end of the tax year?

At the end of the tax year, your tax credit award is finalised using:

  • Income for the tax year which has just finished if there has been no change in your income.
  • Income for the previous tax year, if your income has fallen by £2,500 or less in the tax year which has just finished.
  • Income for the tax year which has just finished, plus £2,500, if your income has fallen by more than £2,500.
  • Income for the previous tax year, if your income has increased by £2,500 or less
  • Income for the tax year which has just finished, minus £2,500, if your income has increased by more than £2,500.

Depending on the result, you may have received the correct amount of tax credits, or you may be owed some money back (called an underpayment), or there may be an overpayment of tax credits which will usually be deducted from the new tax year’s award.

There is more information on what you need to do at the end of the tax year on GOV.UK.

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