Tax credits are complicated and it can be difficult to understand your award. It is still important to check all your award notices carefully and make sure HMRC have all your correct details, including your income for the tax years they are using. You should also check that the money you are paid matches the amounts HMRC say they are due to pay you.
First of all, HMRC works out your maximum tax credits based just on your circumstances and not your income.
Maximum tax credits
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.
Reduction of your tax credits because of your income
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 have income of up to £16,480 (2021/22) 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 £6,565 per year (2021/22). Your income always includes the income of a partner you live with. These income thresholds were different in previous tax years.
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 £6,566 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 £6,565 or £16,480, 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.
You can also use the any of the benefits calculators to check your entitlement, but remember this is likely to vary from what you actually get as HMRC try to pay you what you are entitled to over the tax year.
The tax credit system works out an award which covers a period of up to a year long. You will normally be paid every four weeks or every week. The Tax Credit Office spreads out your award over what is left of the tax year. This means that you may not be paid the same every time.
Changes to your income
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 it goes down, you can give HMRC an estimate, but you will only get more tax credits if you expect to earn at least £2,500 less than the previous tax year. You should also be really careful not to give too low an estimate, otherwise you will be overpaid. It’s a good idea to keep checking your estimate during the year, and let HMRC know immediately if you realise you’re going to earn more than you expected.
Changes to your circumstances
If your circumstances change so that the maximum tax credits you’re entitled to is different, you should let HMRC know as soon as possible. If something happens which might increase your maximum tax credits, this can only be backdated by one month. For example, you should let them know within one month if you have another child (even if you already have two children, it’s a good idea to tell them), or if you start working more hours and would be entitled to working tax credit on top of your child tax credit and/or the 30 hour element. If your maximum tax credit increases because you are awarded disability benefit such as DLA for a child, or PIP for an adult, you can ask for longer backdating, to the date the disability benefit goes back to.
If something happens which would reduce your maximum tax credit, such as a child leaving your household, you should tell them within one month and make sure they do change your award (to avoid being overpaid). This also applies if you stop paying for childcare, or your childcare costs decrease by at least £10 a week for at least four weeks. If a change happens because you, your partner or a child are awarded a disability benefit such as DLA for a child, or PIP for an adult, you can ask for longer backdating.
Some changes end your tax credits award completely. This can happen if you claim UC, or you apply for tax-free childcare, so be careful about doing this. Your tax credits award also ends if your couple/single status changes. Usually, you cannot reclaim tax credits and would have to claim Universal Credit when this happens.
Changes which end or decrease your maximum entitlement have to be reported. Failure to do so can lead not just to you being overpaid, but in some cases to being fined a penalty. You can get more advice on changes of circumstances in tax credits from the Low Incomes Tax Reform Group.
Finalisation and renewals process
After the end of the tax year (5th April each year) your tax credit claim is finalised. It is important to respond to any requests for information you receive in order to make sure you are not overpaid. Usually this process also forms your claim for tax credits for the new tax year.
Unfortunately, because of the way tax credits are worked out, overpayments can happen for lots of reasons (even if you told HMRC about all relevant changes when they occurred). You can find out more about overpayments, and how to deal with them, from the Low Incomes Tax Reform Group , and there is also a useful factsheet about this problem from Advice Now.
Tax credits and other benefits
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.
If you are moving to Universal Credit (UC), your tax credit award stops the day before your UC starts. You will get a letter from HMRC asking you to finalise your tax credit award based on your circumstances and income for the part of the tax year up until your UC award starts.
This advice applies in England, Wales, Scotland and Northern Ireland. If you live in another part of the UK, the law may differ. Please call our helpline for more details.
If you have further questions and would like to contact our advice team please use our advice contact form below or call us.