Child Tax Credit and Working Tax Credit

Universal Credit will replace Child Tax Credits and Working Tax Credits as well as income-based Jobseekers Allowance, Income Support and Housing Benefit. It does not replace Child Benefit.

It is currently being phased in in stages across the UK. You don’t need to do anything until you hear from the Department for Work and Pensions (DWP) about moving to Universal Credit, unless you have a change in circumstances.

This helpsheet looks at Child Tax Credit and Working Tax Credit.

The Child Tax Credit and Working Tax Credit are a key part of the Government’s welfare policy which mixes up the tax system with the social security benefits system. The Government is also keen to reward those who are in work with extra benefits. These tax credits have nothing to do with the tax system. They are not refunds or credits of tax but are simply benefits administered by HMRC.

For what is a relatively simple idea, the whole calculation of Child Tax Credit and Working Tax Credit can be extremely complex.

Child Tax Credit (CTC)

The main points are…

• CTC is paid to families with children.
• It is paid irrespective of whether the parents work.
• It is paid directly to the carer.
• For 2021/22 it consists of a family element of £545 per year and a child element per child of £2,845 per year.
• Families with incomes of up to £16,385 a year should also qualify for the child element of £2,845 a year for each child but this then decreases as income rises.

These are the rates for 2021/22

• Child element – £2,845
• Family element basic – £545
• Disability element – £3,435
• Severe disability element – £4,825

Working Tax Credit

The main points are…

The Working Tax Credit is paid to people who are in work but who have a low family income. It is not just for those with children, it can also be paid to non-parents on low incomes.

The working tax credit also has a childcare element. This is an amount of up to 70% of eligible childcare costs of up to £300 a week for a family that pays for childcare for two or more children, or £175 a week where there are childcare costs for only one child.

To qualify for working tax credit couples with children are required to work at least 24 hours weekly. Hours can be added together but one customer must be working at least 16 hours weekly to qualify. Lone parents are only required to work 16 hours per week and for couples where one of you is over 60, you still qualify as long as the person who’s 60 or over works at least 16 hours per week.

These are the rates for 2021/22

• Basic element – £2,005 a year*.
• Disability element – £3,240 a year.
• Lone parent/couple element – £2,060 a year.
• 30-hour element – £830 a year.
• Severe disability element – £1,400 a year.
• Childcare element – Up to £122.50 a week for one child, or £210 a week for two or more children.

*The basic element was expected to b £1,995 for 2020/21, but as part of the package of coronavirus (Covid-19) support measures, it was increased by an additional £1,045 to £3,040.

Other Key Points

1. The claim for the credits is initially based on income of the previous tax year but is then adjusted based on the income of the actual tax year. Therefore as you do not yet know your income for the present tax year it is important to make a protective claim in case your income turns out to be lower than you expected. If not, any future claim can only be backdated for three months and other past tax credits will be lost. For the self-employed whose income levels can fluctuate considerably this is particularly important.
2. As the tax credit award is initially based on the income of the previous year and then adjusted based on the actual income which may be higher, many people have been overpaid and find themselves in debt to HMRC. To avoid such overpayments, up to £2,500 of increased income is disregarded when the total family income increases between tax years. A fall in income of up to £2,500 is also disregarded.
3. To finalise the tax credit claim for the previous year an annual declaration has to be completed. The renewal date for Tax Credits 2022 is 31 July 2022. Estimated figures can be used if necessary with final figures provided by the following 31 January.
4. Some other benefits may be affected as they can count as income for some means-tested benefits.
5. There are time limits in place for reporting changes in circumstances. You must notify HMRC within one month if you…
   1. Were working 30 hours or more per week but are now doing less.
   2. Were working between 16 and 30 hours per week but are now doing less.
   3. Are no longer responsible for a child or the child no longer qualifies for support.
   4. Where there is a change in the composition of the adult members of the household such as one person leaves or dies, or a single claimant starts living with someone else.
   5. The claimant, or one member of a claimant couple, goes abroad for more than 8 or 12 weeks.
   6. Childcare costs drop by £10 a week or more on average for four weeks in a row, or cease altogether.

Child Benefit

Since 7 January 2013 tax payers with income of over £50,000 have their Child Benefit restricted.

This is administered as an income tax charge on the person earning over £50,000.

The income tax charge will apply at a rate of one per cent of the full Child Benefit for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid.

Where both partners earn over £50,000 it is the partner with the highest income who will be subject to the charge.

How we can help you

We can assist you with making your claim for child tax credit and working tax credit, protective claims and checking any claims you are receiving.