Tax Credits are the main way in which the tax system provides support to people with children and workers on low incomes. Tax 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.
There is an additional element which will cover 70% of qualifying childcare costs of up to £300pw for two children, and a couple entitled to this can enjoy substantial credit even on combined incomes over £25,000.
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, and for “the family”. The child elements are tapered away as income increases. The family element of £545 will be paid in full to couples with a combined income of up to £40,000; after that, it will be tapered away to nothing by the time the joint income reaches £41,330.
CTC is separate from and additional to Child Benefit, which is a flat rate payment in respect of each child. Child Benefit is not income related and is automatically paid (usually to the mother) after a single claim. It is proposed to restrict Child Benefit from 2013 so only basic rate taxpayers will qualify.
Claims are made provisionally for the coming year based on a previous year’s income (2010/11 for 2011/12 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 £10,000.
The Tax Credits system is very complicated, and this can only serve as a brief summary. The HMRC website (www.hmrc.gov.uk) has a ready-reckoner facility which will estimate the amount of either tax credit due, and also has forms and details of how to apply.