Tax Credits

Tax Credits are payments made by the Government to help people or families with low income. There are two elements to Tax Credits:

Working Tax Credits
Child Tax Credits

Tax Credits are not associated to Child Benefit; that is paid separately and does not affect the amount of Tax Credits awarded.

They are awarded based on your income in the previous tax year. For example, if you were to make a claim in June 2009 you would be assessed on all income (including bank interest and dividends) that you received up until 5^th April 2009.

When HMRC make a calculation of payments to award you, these will continue to be paid every four weeks until April 5^th 2010 unless your circumstances change.

Working Tax Credits - Who Qualifies

Working Tax Credits are paid to people who are working or self-employed for a minimum of 16 hours per week and for at least an expected period of 4 weeks. They also have to be either; responsible for one child, disabled or aged 25 and working 30 hours or more a week. They can be paid either to a single person or a couple living together.

If they qualify for the child element of Tax Credits and the carer pays for a registered childminder, day care or nursery, they will be entitled to a maximum of 80pence for every £1 that they pay in childcare up to a limit of £175 per week for one child and £300 per week for two or more children. Therefore; the maximum amount awarded will be £140 per week for one child and £240 per week for two or more children.

Claims can only be made up until the first Saturday after September the 1^st after the child's birthday, unless that child is registered disabled or blind.

To see if you may qualify you can fill in this short questionnaire. For a more accurate calculation use this questionnaire, it will take approximately 15 minutes to complete.

Tax Credits for Professional Contractors and Freelancers

If you are a Professional Contractors or Freelancer and are the director of your limited company you may qualify for Tax Credits. Although company salaries paid to directors are usually low; for the purposes of qualifying for Tax Credits you would need to have a salary that meets minimum wage requirements. All net salary and dividend income will count towards the total income threshold.

Where a joint claim is made, if the spouse is being paid a salary through the limited company; then this income will be included in the income threshold. Like the director, the salary would have to meet minimum wage requirements.

Where there is joint claim made and the spouse does not earn a salary from the company, any income they receive elsewhere will be included in the income threshold.

If you are making a single claim because you do not live with your partner, but they do receive a salary from your company; their earnings do not count towards the income threshold, likewise dividend income if they are a shareholder.

Child Tax Credits (CTC)

Child Tax Credits are payments awarded to either a family or a single person with at least one child up to the age of 16 or 20 if they are in further education that lives with them. They are paid every 4 weeks directly to the person that cares for the child/ren .

Unlike Tax Credits, you do not have to be in work.

Child Tax Credits are made up of two elements:

Family element
Child element
Disability element

The Family element is only paid to families. The same amount is awarded regardless of how many children live with you (this has to be at least one)

The Child element is awarded for each child.

The Disability element is awarded for each disabled child that you are responsible for.

How Tax Credits are calculated

Tax Credits are awarded according to your income and whether you have children. The lower your income the higher the Tax Credits will be awarded.

Child Tax Credit elements 2009/10

Family element - the basic element for families responsible for one or more children	£545
Family element paid to families with one or more children under the age of one. Only one payment regardless of how many children under one	£545
Child element - one for each child or young person you are responsible for	£2,235
Disability element - one for each child you are responsible for if you receive the Highest Rate Care Component of Disability Living Allowance for the child	£2,670
Severe disability element - one for each child you are responsible for if you receive the Highest Rate Care Component of Disability Living Allowance for the child	£1,075

Working Tax Credit elements 2009/10

Basic element - paid to any working person who is eligible	£1,890
Couples and Lone parent element	£1,860
30 hour element - for people who work at least 30 hours a week. Couples with at least one child can claim the 30 hour element if they work at least 30 hours a week between them providing at least one of them works 16 hours or more a week	£775
Disability element - for working people who are disabled	£2,530
Severe disability element - for each person who receives the Highest Rate Care Component of Disability Living Allowance or the Higher Rate of Attendance Allowance	£1,075
50+ Return to work payment (16-29) hours for people who are returning to work after a period of benefits	£1,300
50+ Return to work payment (30+ hours) for people who are returning to work after a period of benefits	£1,935
A childcare element, where you can get back up to 80% of your costs for eligible children	£175 maximum eligible cost per week if you are paying for one child and £300 if you are paying for two or more children

Income limits set by HMRC

If you only qualify for working tax credits then the income limit is £6,420, any amounts over this will reduce the amount awarded.

If you qualify for both, working and child tax credits then the income for working tax credits remains at the rate of £6,420 but the child tax income limit is a higher rate of £16,040.

Your income can be up to £50,000 before and the full family element paid (£66,000 if you have a child under one year). Any income above this level will reduce the family element awarded.

It is possible to claim Tax Credits for short periods of time according to your circumstance and qualifying rights. It is also possible to claim if you are living outside of the UK.

If your income is over the threshold the Tax Credits will be reduced. You can see the reductions on the HMRC website.

Making a Claim

You can make either a joint or single claim. You cannot be a couple and make a single claim if you live together. HMRC provide full guidance on making a claim

You can complete an on-line questionnaire to see if you qualify before requesting a claim pack.

You can request a claim pack from the Tax Credit Helpline on 0845 300 3900 (+44 289 053 8192 from abroad) open 8am-8pm.

Claims can normally only be backdated for a three month period. In exceptional circumstances it may be backdated for a longer period.

Changes in circumstances

If your circumstances change, it is vital to inform HMRC as soon as possible. As the payments are set for a full year, any changes could result in either an underpayment or overpayment being made. Where an overpayment is made, HMRC will deduct it off the next year's award; or demand the full amount as a one off payment if you stop receiving Tax Credits all together.

A penalty will be charged if you fail to tell HMRC within one month any changes that include:

If you made a claim as an individual but are now living with or marrying someone
If you made a claim as a couple but are now separate permanently or if a partner has died
Leave the UK permanently
Go abroad for more than 8 weeks (12 weeks if a family member is being treated for illness or has died
If you lose the right to live in the UK

Other changes you must report that will affect your Tax Credit payments are:

Changes to your working hours
If you have ceased working
If you are on maternity, paternity or adoption leave
If you cannot work due to illness
If you are working for short periods only

Penalties

Penalties may apply if:

You fail to inform of certain changes within one month of the event (£300)
You negligently provided the wrong information (up to £3000)
You fraudulently provided the wrong information (up to £3000)

You have the right to appeal against any penalties levied.

You can find full information on Tax Credits in this HMRC booklet. The following is a worked example from it:

Rashid and Yasmin Ali both work more than 30 hours a week and have three children, all of school age. They do not use 'registered' childcare. Last tax year, Rashid earned £15,000 (rising to £15,750 in the current year) and Yasmin earned £10,000 (rising to £10,500 in the current year). She also received Child Benefit for the children. The couple also have £12,000 in a joint building society account, which last tax year paid gross interest of £360 and they expect the same amount this current year.

Their total gross income last tax year was therefore £25,360 (not including Child Benefit).

Their maximum tax credit entitlement will be a combination of:

Child Tax Credit - family element (£545) and a child element (£2,235 per child), giving £7,250, and
Working Tax Credit - basic element (£1,890), couple's element (£1,860) and a 30 hour element (£775), giving £4,525.

A total of £11,775.

As Rashid and Yasmin's income in the current year is expected to rise by less than £25,000, their tax credit award for the year will be based on last year's income, with £300 of the gross interest being disregarded. This gives last year's income of £25,060. The income threshold is £6,420. Their award is worked out as follows: £
Annual income		25,060.00
Less threshold		- 6,420.00
Excess income		18,640.00
£
Maximum tax credit		11,775.00
Less 39% of excess income		- 7,269.60
Award	4505.40		(£86.64 a week)

If you are currently claiming tax credits you should have received a renewal pack from HMRC in April, May or June. You have until the 31st of July 2010 to submit your renewed claim. If you do not renew your claim your tax credits will stop being paid.

Useful Links

HMRC website - Tax Credits

Working Tax Credits

Minimum wage rates 2009/10

Child Tax Credits

Registered Childminder, Day Care or Nursery

Child Tax Credit elements 2009/10

Working Tax Credit elements 2009/10

Income limits

Claiming Tax Credit for short periods

Living outside of the UK.

Detailed questionnaire