How your tax credits are worked out
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. If you are eligible for Child Tax Credit only, you can earn £16,105 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 your income goes up, compared to the previous tax year, or compared to an estimate you have already given HMRC, it is very important to tell HMRC to avoid being overpaid.
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 the child and disabled child elements of Child Tax Credit if applicable. Your tax credits carry on being reduced by all your income over £6,420 or £16,105, so families on relatively low incomes may still end up with a nil award of tax credits. How high your income can be before you lose all your tax credits depends on the elements which apply to you. There is no one cut-off point.
Child Tax Credit and Working Tax Credit elements are added together if you are eligible for both. The elements are:
- Family element of Child Tax Credit, but only if you are responsible for a child born before 6 April 2017
- Child element for each child or young person, but usually not for a third or subsequent child born on or after 6 April 2017
- Disabled child element for each child or young person on Disability Living Allowance or Personal Independence Payment.
- Severely disabled child element for each child or young person on the highest rate care component of Disability Living Allowance or the enhanced daily living component of Personal Independence Payment.
- Basic element of Working Tax Credit, this is always included if you or your partner are eligible for Working Tax Credit.
- Couple/lone parent element, this is included if you live with a partner or live alone with dependent children/young people.
- 30 hour element, this is included if you or your partner work 30 hours or more, or you have children and your combined hours are at least 30 per week.
- Disability element, this is included for each disabled adult who works at least 16 hours a week; certain conditions have to be met to count as disabled.
- Severe disability element, this is included for each adult who gets the highest rate care component of Disability Living Allowance or the higher rate of Attendance Allowance.
- Childcare element, this is included if you meet the conditions.
You may want information about the rates of the tax credit elements. You can use the gov.uk tax credits calculator; this will give you a lump sum amount from the date you use it until the end of the tax year. The Turn2Us website also has a benefits checker which will estimate your tax credits for you, and EntitledTo is another free calculator which includes tax credits.
Remember if the rate of your tax credits changes for any reason, they count as income for other benefits, for example, Housing Benefit. So it is important to tell the local authority (council) about changes in your tax credits.