How tax credits work

How tax credits work

What are tax credits?

Tax credits are payments from the government. If you're responsible for at least one child or young person, you may qualify for Child Tax Credit. If you work, but are on a low income, you may qualify for Working Tax Credit. You can often get both types of tax credits. They aren't taxable.

How tax credits work

This page is showing information about tax credit awards for 2015/16. For information on tax credit awards for the previous year, please see our guide on how tax credits work in 2014/15

Initial and final award

The tax credit system has two stages: an initial award and a final award.

Your tax credit award for the 2015/16 tax year (6th April 2015 to 5th April 2016) is based on your circumstances during that year, i.e. whether you are single or in a couple, the number of children you have, your childcare costs, if anyone in your family is entitled to disability benefits and the number of hours you work a week.

Your initial tax credit award is based on your income in the last tax year 2014/15 (6th April 2014 to 5th April 2015).

Your final tax credit award can be calculated using either your 2014/15 income or your 2015/16 income. Which year's income is used depends on whether your income has stayed roughly the same, dropped by more than £2,500, or gone up by more than £5,000. If your income falls during the year, the first £2,500 difference between last year’s income and this year’s is ignored. If your income goes up the first £5,000 increase is ignored. Therefore:

For drops in income:

  • if your 2015/16 income falls by more than £2,500, from your 2014/15 income, your final tax credit award will be calculated using your 2015/16 income plus £2,500,
  • if your 2015/16 income falls by less than £2,500, your final tax credit award will be calculated using your 2014/15 income.

For example, if in 2014/15 your income was £10,000 and in 2015/16 your income is £5,000, the fall is £5,000, therefore your 2015/16 final tax credit award would be calculated based on your 2015/16 income plus £2,500, so an income of £7,500.

For increases in income:

  • if your 2015/16 income has risen but not by more than £5,000 from your 2014/15 income, your final tax credit award will be calculated using your 2014/15 income.
  • if your 2015/16 income has risen by more than £5,000 compared to your 2014/15 income, your final tax credit award will be calculated using your 2015/16 income minus £5,000.

For example, if in 2014/15 your income was £10,000 and in 2015/16 your income is £25,000, the rise is £15,000, therefore your 2015/16 final tax credit award would be calculated based on your 2015/16 income minus £5,000, so an income of £20,000.

HM Revenue and Customs do this to provide extra support if your income falls but also to allow room for your income to rise before it affects your tax credits.

In effect the system sets and pays you a provisional amount of tax credit during the tax yea and then the amount they should have paid you and the amount you were actually paid are reconciled at the end of the tax year.

Repayments

If your 2015/16 income is set to rise by more than £5,000 then you may be being paid too much tax credits and will have to make a repayment next tax year. However, it is your choice as to whether you report a change in your income now or whether you wait for an automatic adjustment to be made by HM Revenue and Customs at the end of the tax year.

Similarly, if your income is set to drop you can either tell HMRC about this change now, in which case your award will be re-calculated using an estimate of your likely income this year, or wait until the end of tax year review.

More information is available on change of circumstances.

If you are already receiving tax credits please note that you may be subject to an adjustment from previous years. To find out more see tax credit overpayments.
 

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