Tax Credits

Tax Credits, Child Benefit and Universal Credit

Tax Credits provide state support to people with children and workers on low incomes. The credits are paid to those who claim them, and are not an adjustment in the tax computation.

Working Tax Credit (WTC) is paid to employed and self-employed people on low incomes. The full entitlement is given for an income of only £6,420, and it is tapered away as a couple’s joint income increases above that.

Child Tax Credit (CTC) is paid to the main carer for children up to 16 years old, or up to 18 in full-time education. Entitlement is built up of elements for each child (£2,750), and for the family (£545). CTC is tapered away at 41p for every £1 by which the couple’s combined income exceeds £16,010. CTC of £6,045 (2 children plus family) will have tapered away completely when income has reached £30,755.

Tax Credit claims are made provisionally for the coming year based on a previous year’s income (2013/14 for 2014/15 claims), and may be revised up or down at the end of the year if income has changed significantly. However, increases in income will be disregarded if they are up to £5,000.

The Tax Credits system is very complicated. The HMRC website has details of how to apply

CTC is separate from and additional to Child Benefit, which is paid at £20.50pw for the first child and £13.55pw for additional children. Child Benefit paid to the family is clawed back from the highest earner in the family at the rate of 1% for every £100 of adjusted net income over £50,000. Where income exceeds £60,000 for the tax year, 100% of the child benefit is clawed back through the tax system. The family may elect not to receive the benefit to avoid this tax charge.

It is intended that Universal Credit will replace Tax Credits anda range of other benefits, including Housing Benefit, over the next few years. However, the new system is only at a pilot stage and it is uncertain when migration will be complete.