Tax Credits

WILL YOU BE BETTER OFF GOING BACK TO WORK?

If you are working out whether you might be better off on tax credits, these points may be important.

You can earn up to £86 a week from permitted earnings on top of IB or severe disablement allowance (SDA). However, if you get IS, HB or CTB as well, only a maximum of £20 of such earnings can be ignored in those assessments. You might possibly be better off staying on your IB or SDA and doing permitted work.

If you are a homeowner, your IS or income-based JSA may include mortgage interest payments. Tax credits do not pay towards mortgage interest.

You keep the full amount of any maintenance payments on top of your tax credits, whereas, you can only keep up to £10 a week of any maintenance paid to children on IS or income-based JSA.

Depending on your level of tax credits, you may be entitled to some of the help available to those on IS including: free prescriptions and other health benefit; free legal help; and home repair assistance.

Tax credits (above the basic CTC family element) may give you access to Sure Start maternity grants and social fund funeral payments.

IS entitles your children to free school meals, and free milk and vitamins if they are under 5, whereas if you get tax credits you will only be entitled to these for your children if your income is below a certain level.

DO YOU QUALIFY FOR CTC?

You can get CTC if you meet all of the following conditions at the time you make your claim:

You must be at least 16 years old.
You, or your partner, must be responsible for a child or young person who normally lives with you.
You must satisfy the residence and presence conditions.
Your income must be within a set limit, which varies according to your family circumstances.

If you are part of a couple you claim jointly and your claim is called a 'joint claim'. Otherwise you claim as a single person.

Your claim will end immediately if you are a couple who cease to be a couple or if you are a single claimant who stops being a single person. Your entitlement will also usually end if you cease to be responsible for any children or young people (see below).

RESPONSIBLE FOR A CHILD OR YOUNG PERSON

A child is someone aged under 16. Once the child reaches 16 they will continue to be treated as a child for tax credit purposes until 1 September following their 16th birthday.

A young person is someone over 16 but under 19 who is in full-time, non-advanced education. Young people continue to count for tax credit purposes for the first 20 weeks after they leave full-time education if they are under the age of 18 and if they are registered with the Careers Service, Connexions Service, the Department for Education and Skills, or Skillseekers in Scotland. Young people can no longer count for tax credit purposes once they start work or training or claim IS, income-based jobseeker's allowance (JSA) or incapacity benefit in their own right.

Where two or more households make a claim in respect of the same child (e.g. where the child of separated parents spends time with both) then the two households may agree and jointly elect who is to receive CTC for that child. If they cannot agree, then the Inland Revenue will decide which parent has the main responsibility for that child.

CTC will not normally be payable in respect of a child who:

Has been placed by a local authority in certain types of accommodation paid for by that local authority.
Has been placed for adoption with a family by a local authority which is paying towards their costs.
Is serving a custodial sentence of more than 4 months.
Is 16 or older and is claiming CTC themselves for their own child.

Young people no longer count for tax credit purposes once they start remunerative work (unless they are still in full-time education).

If a qualifying child or young person dies during the period of an award then CTC will continue in respect of them for 8 weeks following their death (or until an 18-year-old would have become 19, if that is earlier).

CTC ELEMENTS

CTC is made up of a number of elements.

Family Element: this is included in the calculation for all who qualify for CTC.

Family Element (baby): this extra amount is included where the family have a child who is under the age of one.

Child Element: this is included for each child or young person in your family (see 3). It is set at a single fixed rate regardless of the age of the dependent child.

Disabled child element: this is included where any child:

Is in receipt of either element of disability living allowance (DLA) at any rate (or would be but for the fact that the child is a hospital inpatient); or
Is registered as blind, or has ceased to be registered within 28 weeks of the claim to CTC being made.

Severely Disabled child element: this is included where any child is in receipt of DLA highest rate care component (or would be but for the fact that the child is a hospital inpatient).

DO YOU QUALIFY FOR WTC?

You can get WTC if you meet the following conditions at the time you make your claim:

You must be at least 16 years old; and
- either you, or your partner, are working for 16 or more hours a week, and
- You have a dependent child or young person, or
You have a physical or mental disability that puts you at a disadvantage in getting a job and you were previously in receipt of some form of disability benefit, or
You (or your partner) are aged 50 or over and qualify for the 50 plus element (see below); or
you, or your partner, are aged 25 or over, and work at least 30 hours a week.
You satisfy the residence and presence conditions.
Your income is within a set limit, which varies according to your family circumstances.

Your entitlement will also usually end immediately if you cease working the right number of hours to qualify (see below).

WHAT DOES AND DOES NOT COUNT AS WORK?

In order to be treated as being in 'qualifying remunerative work' you must either:

Be working at the date of your claim, and the work must be expected to continue for at least 4 weeks after you have made the claim; or
Have an offer of work which you are expected to start within 7 days of making your claim, and the work must be expected to last for a total of at least 4 weeks.

'Work' means work that is done for payment or in expectation of payment.

If you are an employee the number of hours that will count will be the number of hours you normally work each week, including any overtime you regularly do.

If you are self-employed the number of hours that will count will be those that you actually work in your self-employed capacity.

In calculating the number of hours you work towards the 16 or 30 hours a week limit you cannot include any time spent in unpaid meal breaks or any periods of customary or paid holiday. Exceptionally, if you are a worker in a school or someone who otherwise works on a seasonal basis, and you have a recognisable pattern of employment over the year, you may then ignore the school holidays or other holiday periods. This rule benefits those such as school assistants or dinner ladies who might otherwise be found not to be working enough hours to qualify.

WHEN YOU ARE NOT TREATED AS BEING IN WORK

Some kinds of work do not count:

Work for a charitable or voluntary organisation or otherwise as a volunteer if you are only paid expenses.
Work on a training scheme where you are paid a training allowance (unless taxable as trade profit).
Work as part of Intensive Activity Period activities or Employment Zone Programmes as a jobseeker.
Activities when you are in receipt of a sports award and no other form of payment is made to you.
Work where you are caring for someone who is temporarily living with you if the only payment you get is from a local authority, health authority, primary care trust or voluntary organisation and your income is below the taxable limit for this sort of work.
When you are treated as being in work - Provided that you have been accepted as being in 'qualifying remunerative work' then usually you will continue to be treated as being in work for WTC purposes, with your number of hours being your usual working hours prior to the interruption.

This applies:

If you are not working because you are off sick. You will continue to be treated as being in work for a period of up to 28 weeks while you are receiving statutory sick pay, short-term lower rate incapacity benefit, or income support (or National Insurance contribution credits only) on the basis of being incapable of work.
If you are self-employed and off sick you will also continue to be treated as being in work if you would have got statutory sick pay but for the fact that as a self-employed person you are not entitled to it.
If you are off work and getting maternity allowance, or statutory maternity, paternity or adoption pay, or you are on ordinary maternity leave, paternity leave or adoption leave.
If you are temporarily suspended from work while complaints or allegations against you are being investigated.
If you are on strike, but only for a period of up to 10 consecutive days on which you would normally have been working.

WTC ELEMENTS

WTC is also made up of a number of elements. If you are a couple and qualify for more than one disability, severe disability or 50 plus element, then more than one will be included in the calculation.

Basic element - This will be included in the calculation for all who qualify for WTC.

Couple element - This will be included where you are one of a couple (married or living together as husband and wife).

Lone parent element - This will be included where you are single and have a dependent child or young person.

30 hour element - This will be included where you are treated as working enough hours. This will be the case when:

One person works enough hours because you and/or your partner if you have one, work for at least 30 hours a week; or
You are part of a couple and together you work enough hours because:
- You have dependent children or young people; and
- between you, you work for at least 30 hours a week in total; and
- At least one of you works for at least 16 hours a week.

Severe disability element - This will be included if you, or, in the case of a couple, one of you, gets either higher rate attendance allowance (AA) or disability living allowance (DLA) highest rate care component (or would but for the fact that you are in hospital).

50 plus element - You will qualify for this if you, or your partner if you have one, are aged at least 50 and work at least 16 hours a week. For at least 6 months before starting this work, you or your partner must have been getting:

Income support; or
Jobseekers allowance (whether contributory or income-based); or
Incapacity benefit (IB); or
Severe disablement allowance (SDA); or
State pension topped up by pension credit; or
A training allowance paid under Work-Based Learning for Adults or Training for Work; or
another person was getting one of those benefits and claiming for you as their dependant; or
you were getting National Insurance contributions credits (for example if you were signing on as unemployed).

If you or your partner were getting carer's allowance or bereavement allowance or widowed parent's allowance before claiming one of the benefits in the list above then you can combine the time spent on the two sets of benefits to count towards the 6-month qualifying rule.

The 50 plus element is included in the calculation at two rates:

A lower rate if you work at least 16 hours but less than 30 hours a week.
A higher rate if you work for at least 30 hours a week.

The 50 plus element is payable for 12 months where your employment is continuous, or, where your employment is not continuous, for a total of no more than 12 months, provided that the gaps between any periods of entitlement are of less than 26 weeks.

Childcare element - You get a tax credit equal to 80% of eligible childcare costs up to a maximum of £175 childcare costs for one child, or £300 for two or more children. (So the highest childcare tax credit you could get is £140 for one child, or £240 for two or more.)

You include a childcare tax credit if:

You are a lone parent working at least 16 hours a week; or
You are one of a couple and both of you work at least 16 hours a week; or
You are one of a couple and one of you works at least 16 hours a week and the other is 'incapacitated'.

If you are on maternity or adoption leave, the statutory period you are away from work will count as though you were still working. So you will be able to claim help with the childcare costs for the new child provided you were working the hours as set out above before your break from work.

You count as 'incapacitated' if you receive any of the following:

Housing benefit (HB) or council tax benefit (CTB) which includes a disability premium or a higher pensioner premium, or where you have already been held for the purposes of HB/CTB childcare costs to be incapacitated; or
short-term higher rate or long-term IB, AA, SDA, DLA, industrial injuries or war pensions constant attendance allowance; war pensions mobility supplement (or would get one of the benefits above but for the fact that you are a hospital inpatient).

In order to qualify, your child or children must be aged 15 or younger, or aged 16 or younger if they meet the same rules as for the disabled child element within CTC. You can claim a childcare element up to the last day of the week containing the 1st September following their 15th birthday, or for a disabled child, their 16th birthday.

Your childcare must be provided by a registered childminder (or equivalent), or by a childminder approved by an accredited organisation, or an out-of-school-hours scheme run by a school or local authority. If you've arranged the childcare but it hasn't started by the time you make your claim, the amount is based on an estimate provided by the childcare provider.

If your childcare costs vary (eg you pay more during the school holidays) then it is your average weekly costs over the period covered by your award that will be taken into account in the calculation. If there is a change in the childcare provided while you are getting WTC, or your childcare charges go up or down by £10 a week or more, or it stops altogether, you must report this promptly. Your WTC will be recalculated as a result.

WTC DISABILITY ELEMENT

This element is a significant one for disabled people. In addition to working at least 16 hours a week you also have to satisfy two other tests, one relating to your disability, one to your recent receipt of a qualifying benefit.

The 'disability' test - To get the disability element of WTC included in your assessment, you must have a 'physical or mental disability which puts [you] at a disadvantage in getting a job'. How this is assessed depends on whether you are making an initial claim or a renewal claim.

The 'qualifying benefit' test - To get the disability element of WTC included in your assessment, you must also meet one of the following conditions.

Condition A - At any time in the last 26 weeks before your claim for WTC you, or your partner if you have one, were getting: higher rate short-term or long-term incapacity benefit (IB), or severe disablement allowance (SDA).
Condition B - At any time in the last 26 weeks before your claim for WTC you were getting the disability or higher pensioner premium in income support (IS), income-based jobseeker's allowance, housing benefit (HB) or council tax benefit (CTB).
Condition C - On the date of your claim, you are getting disability living allowance (DLA - either component, any rate) or attendance allowance (or an industrial injuries or war pensions scheme equivalent).
Condition D - On the date of your claim, you have a Motability car.
Condition E - the 'Fast Track' - This route to the disability element is referred to as the 'Fast Track' because it allows some of those who have been off work for a while to return to work without having either to have been off sick for a prolonged period, or to fit the qualifying rules for DLA, etc. At any time in the last 8 weeks before your WTC claim you, or your partner if you have one, had been getting, for at least 20 weeks either:
- statutory sick pay, occupational sick pay, lower rate short-term IB or IS on the basis that you were incapable of work; or
- Class 1 or Class 2 National Insurance (NI) contribution credits on the basis that you were incapable of work; and
- You have a disability, at the date of claim, which is likely to last for at least 6 months (or for the rest of your life if your death is expected within 6 months); and
- Your gross earnings are less than they were before your disability began by at least 20% (or £15 a week, whichever is greater).
Condition F - At any time in the last 8 weeks before your WTC claim you, or your partner if you have one:
- Had been undertaking training for work (which means certain government training courses or a course of 16 hours or more a week learning occupational or vocational skills); and
- Within the 8 weeks prior to the start of the training course, had been getting higher rate short-term or long-term IB, or SDA.
Condition G - This condition relates to making a renewal claim. It provides that you will be treated as qualifying for the disability element if, within the 8 weeks before you make your claim, you had previously met Condition A, B, E or F. This should allow those who were getting a qualifying benefit such as IB, etc, to continue to get the WTC disability element for long after they stopped receiving that benefit. Note also that if you got the disability element because you met Condition C or D, as you were in receipt of, for example, DLA, you need to be still getting that benefit when you make your renewal claim.

INCOME WHICH HAS THE FIRST £300 IGNORED

The following types of income will be included in the calculation, but the first £300 of such income will be ignored:

Pension income, including taxable income from annuities and pensions paid by the Crown or a former employer, but excluding war disablement pensions, war pensioners mobility supplement and certain other war service pensions which are exempt from income tax.
Investment income, including taxable income from stocks and shares.
property income, including taxable income from rents.
Foreign income, including any income arising from possessions or from securities abroad, whether or not this was remitted to the UK, converted into British pounds. This excludes any pensions or annuities paid under German or Austrian law to victims of National Socialist persecution and certain other non-taxable receipts. If you receive a foreign pension, whether or not it was remitted to the UK, 90% of the full amount received will be taken into account (in British pounds not the foreign currency).
Notional income, including:
- various forms of income treated as notional income under tax legislation, eg stock dividends.
- income which you have deprived yourself of in order to gain entitlement to, or increase the amount of, tax credit.
- income which would be available to you if you applied for it.
- income you have done without because you have provided a service to another person but not been paid for it or been paid less than the ?going rate? for it.
- trust income that, under the income tax rules is treated as the income of another person, eg investment income of a child where the trust funds have been provided by the parent and the amount exceeds £100.

EMPLOYMENT INCOME

All taxable income from employment is usually taken into account. In contrast to all other means-tested benefits, income from employment is taken into account gross, that is, before income tax and National Insurance (NI) contributions have been deducted.

Such income includes:

PAYE income from an office or employment, including pay, holiday pay, bonus and commission.
Payment made in respect of expenses that are not 'wholly, exclusively and necessarily incurred' in the performance of the job.
Any cash voucher, non-cash voucher or credit token (but not if for eligible childcare, see below).
The value of a car made available for private use, and of car fuel.
Any goods or assets your employer gave you which you could sell for cash (eg gifts of food, drink, clothes, cigarettes) or any payments made by your employer that you should have paid yourself (eg if your employer paid your rent to your landlord or paid your personal phone, gas or electricity bills).
Redundancy payments to the extent they are subject to income tax.
Statutory sick pay (SSP), statutory maternity pay (SMP), statutory adoption pay (SAP) or statutory paternity pay (SPP) in excess of £100.
Certain retainer fees or similar compensation for a restrictive undertaking.
Strike pay received as a member of a trade union.
Taxable gains from security options (eg company shares, bonds, government gilts) acquired as a result of your employment.

Some payments made from your earnings which are tax exempt are ignored in reckoning your gross income.

These include:

fees and subscriptions to professional bodies and learned societies, employee liabilities and indemnity insurance.
contributions made under the Gift Aid and Give-As-You-Earn payroll deduction schemes for payments to charity.

DISREGARDED EMPLOYMENT INCOME

The following specific types of income are disregarded as employment income. As such they are not treated as any form of income:

Payments in respect of expenses which are wholly, exclusively and necessarily incurred in the performance of the duties of the employment or which are qualifying travelling expenses for tax purposes.
Payment or reimbursement of expenses in connection with the use of a car parking space at your place of work, or for certain overnight expenses or for removal expenses.
Cash vouchers or equivalents that you are to use to pay for childcare costs of the sort which would be included for WTC purposes.
The value of meal vouchers received as an employee.
Other Extra Statutory Concessions which are regarded as not subject to tax by the Inland Revenue.
Certain taxable benefits provided by an employer which do not have to be reported for tax credit purposes, eg the provision of living accommodation and cheap loans.

SELF-EMPLOYMENT INCOME

Your taxable profit for income tax purposes - whether as a sole trader or as a partner in a business - is taken into account for tax credit purposes. You can deduct the following items from your taxable profit for tax credit purposes:

The gross amount of any contributions you made to a pension scheme or retirement annuity contract.
Any trading losses brought forward from a previous year under the tax credit rules.
The gross amount of any Gift Aid payments you made.

If your business made a loss you should contact the Tax Credit Helpline as there are special rules dealing with losses for tax credit purposes.

BENEFIT INCOME

All benefit income is taken into account in full as income, except:

Attendance Allowance and Disability Living Allowance.
Back-to-work bonus and return to work credit.
Bereavement payment.
Child Benefit.
Christmas bonus.
Guardian's Allowance.
Housing Benefit (HB), Council Tax Benefit (CTB) and discretionary housing payments.
Income Support (IS), except to strikers.
Incapacity Benefit (IB) which is either the short-term lower rate or that paid to those who were previously in receipt of Invalidity Benefit and are still in the same period of incapacity for work.
Industrial Injuries Benefit.
Income-based Jobseeker's Allowance (JSA) and contribution-based JSA (except for that part which is taxable).
Maternity Allowance.
Severe Disablement Allowance.
Social Fund payments.
SMP, SAP and SPP where the first £100 a week will be ignored as income; anything above that will be taken into account (SSP is treated in full as income).
Certain compensation payments, including compensation payments for the non-payment of IS.
JSA, or HB
payments in lieu of milk tokens or vitamins.

CTC ELEMENTS 2007/08 YEARLY AMOUNT

Family Element (normal) - £545
Child Element - £1,845
Disabled Child Element - £2,440
Severely Disabled Child Element - £980

WTC ELEMENTS 20076/08 YEARLY AMOUNT

Basic Element - £1,730
Couple Element - £1,700
Lone Parent Element - £1,700
30 Hour Element - £705
Severe Disability Element - £980
50 Plus element (16 to 29 hours rate) - £1,185
50 Plus element (30+ hours rate) - £1,770
Disability Element - £2,310
Childcare Element
- Maximum Eligible Cost (1 child) - £175
- Maximum Eligible Cost (2 or more children) - £300
Percentage of eligible costs covered 80%

THE STEPS IN TAX CREDIT CALCULATIONS

You work out your entitlement to tax credits by following a number of steps:

Step 1: Work out the maximum tax credits for yourself and for your family. This will be the combination of all of the above CTC and WTC elements that apply to you.
Step 2: Work out your annual income. It is the previous year's income which will normally be used (2006/07 for 2007/08).
Step 3: Find the appropriate income threshold figure (see below).
Step 4: Compare the income to the threshold figure. If your normal income is below or the same as your income threshold, you'll get the maximum tax credit for your family. If your normal income is above your income threshold, deduct the threshold figure from the income. Then apply the correct taper to the resulting excess income.
Step 5: Deduct the result at Step 4 from your maximum tax credits (Step 1). The amount you are left with is your tax credit entitlement.

Note: This calculation effectively only gives an estimate of your entitlement, as it is your actual income in the year of the award which determines your true entitlement and this cannot usually be known accurately until after the year has ended.

THE INCOME THRESHOLDS AND TAPERS

The threshold figures used in the process described above are:

2007/08 INCOME THRESHOLD FIGURE
- WTC - £5,220
- CTC (Only) - £14,495
- CTC (Family Element Only) - £50,000

If you qualify for both CTC and WTC, the WTC figure is used in the calculation.

You apply a taper to work out how much of any excess income above the threshold should be taken from your maximum tax credit entitlement. This taper is usually 37%. However, the family element of CTC is retained until income exceeds a further threshold of £50,000 a year (£961.53 a week). At that point the family element starts to be tapered away at a rate of 6.67% (roughly £1 for every £15 of gross income above £50,000). This normally runs out altogether when income reaches £58,000.

When the HM Revenue and Customs is doing these calculations it must apply the taper in the following order: first to the WTC elements, then to the WTC childcare elements, then to the CTC child elements and finally to the CTC family elements. The practical effect of this is that those payments made to the employee (the non-childcare elements of WTC) are reduced before those made direct to the main carer (the childcare elements of WTC and CTC).

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