How tax credits work
Please note: You are no longer able to make a new claim for tax credits. In most cases, if you want to make a new claim, you will need to claim Universal Credit instead. You may also need to claim Universal Credit if you experience a change in circumstances.
If you tell us you are currently receiving tax credits we will work out how much you should be entitled to. So you can see how moving to Universal Credit could affect your entitlements we will also show what you might be entitled to under Universal Credit on the results page.
This guide remains for people who are still claiming tax credits.
What are tax credits?
Tax credits are payments from the government administered by HM Revenue and Customs. There are two types of tax credit. 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 which can also provide help with childcare costs. You can often get both types of tax credits, they are administered and paid together and there is one claim form. They aren't taxable.
How tax credits work
This page is showing information about tax credit awards for 2023/24.
Initial and final award
The tax credit system has two stages: an initial award and a final award.
Your tax credit award for the 2023/24 tax year (6 April 2023 to 5 April 2024) 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 2022/23 (6 April 2022 to 5 April 2023).
Your final tax credit award can be calculated using either your 2022/23 income or your 2023/24 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 £2,500. 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 £2,500 increase is ignored. Therefore:
For drops in income:
- if your 2023/24 income falls by more than £2,500, from your 2022/23 income, your final tax credit award will be calculated using your 2023/24 income plus £2,500.
- if your 2023/24 income falls by less than £2,500, your final tax credit award will be calculated using your 2022/23 income.
For increases in income:
- if your 2023/24 income has risen but not by more than £2,500 from your 2022/23 income, your final tax credit award will be calculated using your 2023/23 income.
- if your 2023/24 income has risen by more than £2,500 compared to your 2022/23 income, your final tax credit award will be calculated using your 2023/24 income minus £2,500.
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 year 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.
If your 2023/24 income is set to rise by more than £2,500 then you may be 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.