Don’t delay tax credit renewal – If you missed the tax credit renewal deadline make your claim now.
On 1 July 2019 HMRC launched an advertising campaign reminding customers to renew their tax credits by the deadline, which was 31 July. Guidance on how to renew can be found here.
The government is gradually introducing Universal Credit (UC), a new benefit which will eventually replace tax credits. It is expected that most existing tax credits claimants will be moved to UC between November 2020 and December 2023. This will follow a pilot involving up to 10,000 people who will be moved between July 2019 and July 2020.
If an individual has claimed tax credits and UC during the same tax year, then HMRC will stop their tax credit award with effect from the day before their UC entitlement starts.
There are two tax credits that have different qualifying conditions but which can be claimed on the same form.
To be entitled to tax credits, a claim must be made. Without a claim, there can be no entitlement.
Working tax credit (WTC) is paid to people working on a low income and it is based on the hours of paid work. Unpaid work does not count for WTC. To qualify to claim WTC an individual must be aged 16 or over, in qualifying remunerative work (employed or self-employed) and usually living in the UK.
The claimant must work a minimum number of hours a week.
Do remember that what counts as work can be:
- for someone else, as a worker or employee
- as someone who’s self-employed
- a mixture of the two.
Child tax credit (CTC) supports families with children. It is paid in addition to child benefit and the person does not have to be working to be entitled to it.
Income thresholds are an important part of the tax credits calculation because if a claimant’s income is above the relevant threshold their tax credits will start to be reduced (referred to as ‘tapering’).
WTC only or WTC and CTC claims
The income threshold for WTC only, and combined WTC and CTC claims, is £6,420. One area of confusion is around claims for both WTC and CTC. Claimants often think that the CTC only threshold applies to them because they are not getting any WTC. However, a distinction must be made between a claimant entitled to WTC who doesn’t actually receive any because their income is too high, versus a claimant who doesn’t have any entitlement to WTC. Where a person’s circumstances are such that they qualify for the basic element of WTC, that element along with any other elements of WTC that their circumstances dictate should be included in the calculation and the £6,420 threshold used.
Elements of WTC
WTC is made up of a number of separate components:
- basic element – up to £1,960
- lone parent/couple – up to £2,010
- 30 hour element – up to £810
- disability element – up to £3,165
- severe disability element – up to £1,365 a year usually on top of the disability payment
- child element (for children born on or after 6 April 2017, this may be limited to two children unless an exception applies) – up to £122.50 (one child) a week or £210 (two or more children) a week.
Tax credits rates for April 2019 can be found here
HMRC guidance on ‘How do the tax credits work?’ can be found here
WTC only
Every claim for WTC will include at least the basic element of WTC (up to £1,960 for 2017/18 and 2018/19). In the case of joint claims, only one basic element is awarded.
If a person is only entitled to WTC and not entitled to any other elements, then there will be a reduction on WTC if their income is above the £6,420 threshold.
This means that if the person’s income is less than £6,420, he/she will receive the maximum amount of tax credits.
Elements of CTC
CTC is made up of the following components:
- family element (one per family) – £545
- child element (paid for each child) – £2,690
- disabled child element (paid in addition to the child element) – £2,950
- severely disabled child element (paid in addition to the child and disability elements) – £1,190.
CTC only claims
Where a claimant (or their partner) has no entitlement to the basic element of WTC, but they are responsible for a child or qualifying young person, the CTC only threshold should be used. For 2019/20 this is £16,105. Above the £16,105 threshold, the maximum tax credits award will be reduced by 41p for every £1 of income.
Where a claim includes both WTC and CTC, the WTC is tapered first, followed by the childcare element of WTC, and finally the CTC.
Each calculation of tax credits involves a series of steps which, in brief, are:
- Determine the number of relevant periods. This is a period during the award period in which the rate of tax credit a person is entitled to remains the same. A relevant period ends with a change of circumstances which changes the amount of tax credits they are entitled to.
- Calculate maximum entitlement for each relevant period by adding together the WTC and CTC elements that are applicable to the claimant’s circumstances.
- Apportion the income figure and the relevant threshold for each relevant period on a daily basis.
- Calculate the ‘excess income’ figure (the amount that the person’s income exceeds the threshold for that relevant period).
- Calculate the ‘reduction due to income’ by multiplying the ‘excess income’ figure by the first taper percentage (currently 41%).
- Take the Step 5 figure away from the figure in Step 2 to find the tax credits for the relevant period.
- Add the amount due for each relevant period to find the entitlement for the tax year.
Article from ACCA In Practice
