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What are Tax Credits and How They Work?


  • What are Tax Credits
    • What is Universal Credit?
    • Types of Tax Credits:
    • Child Tax Credit
    • Working Tax Credit
  • Difference between tax credits and benefits?
  • Tax credits’ impact on other benefits?
  • How much Tax Credit you will get?
  • What is Child Tax Credit?
    • Child Tax Credit – Eligibility and Elements
    • How does the child tax credit work?
    • Child Tax Credits – Income Thresholds
  • What is Working Tax Credit
    • Working Tax Credits – Eligibility and Elements
    • How much you can get on tax credit
    • Child Tax and Working Tax Credits
  • Am I eligible?
  • How to claim tax credits?
  • When do tax credits get paid?
  • Renewing your tax credit
  • Universal Credit Replacement

What are Tax Credits

Tax credits are government payments that provide extra money to individuals who need it, such as parents who need help caring for their children, disabled employees, and low-income persons. Tax credits can be worth thousands of pounds each year, but they must be renewed yearly, unlike many other benefits. If your family or job situation changes, your tax credits may increase, decrease, even stop.

For many people, Universal Credit has recently replaced tax credits. Because Working Tax Credit and Child Tax Credit are being phased out in favour of Universal Credit, you may not be able to file a new claim.

What is Universal Credit?

Universal Credit is a government benefit payment that supports those who require additional financial assistance. It’s for low-income individuals, and it may be claimed by those who work full-time, part-time, or are jobless.

Universal Credit was created to take the role of several benefits and credits, such as Working Tax Credit and Child Tax Credit. These are the benefits that will be phased out in favour of Universal Credit:

  • Income-based Jobseeker’s Allowance
  • Income-related Employment and Support Allowance
  • Income Support
  • Working Tax Credit
  • Child Tax Credit
  • Housing Benefit – for rent only

If your circumstances change while receiving one of these benefits or Tax Credits, you must notify the change as quickly as possible. Changes in your circumstances may necessitate a switch to Universal Credit, which will result in the loss of your existing benefits.

Unless you’ve had a change in circumstances that the Department of Works and Pensions (DWP) should be aware of, there’s nothing you need to do if you haven’t heard from the DWP. The Severe Disability Premium is the only benefit not yet replaced by Universal Credit. You will not be eligible for Universal Credit if you already get this benefit.

Types of Tax Credits

Depending on your household’s circumstances, you can claim one or both. HM Revenue & Customs (HMRC) is in handling tax credit claims. The credit’s nature determines a tax credit’s value; many tax credits are only available to people or companies in specified localities, categories, or industries.

There are two types of tax credits:

Child Tax Credit:

You may be eligible for a child tax credit if you are responsible for the care of a child.

Working Tax Credit:

It is dependent on your earnings and the number of hours you work. Work that is done for free or for no money does not count.

Difference between tax credits and benefits?

Tax credits are often seen as a benefit; however, unlike other social security benefits, they are calculated annually and given in weekly or monthly instalments during the tax year (6 April in one year until 5 April the following year). HMRC also handles them, but the Department for Work and Pensions (DWP) deals with most other benefits, including universal credit.

Tax credits’ impact on other benefits?

Tax credits will not change the amount of child benefit you receive, but they may influence the amount of other benefits you receive. Signing up for tax credits may result in a reduction in:

  • Housing Benefit
  • Income Support
  • Jobseeker’s Allowance depending on your income
  • ESA (Employment Support Allowance) based on your income
  • Pensions Credit

If you sign up for Tax-Free Childcare, you will also be unable to claim tax credits. This is a government programme that gives parents and guardians £500 every three months for each child to help with licensed childcare costs.

However, claiming tax credits may make you eligible for extra money from the government in the form of other benefits. Claiming tax credits may entitle you to handle a lot of daily routine expenses and events.

How much Tax Credit you will get?

The amount of tax credits you’re likely to get is determined by the following factors:

  • The more money you make, the less money you’ll get. However, there is no predetermined income cap because your (and your partner’s, if you have one) circumstances determine how much you earn.
  • Marital Status. Couples must file joint claims based on their combined income.
  • The birth dates of your children impact how much help you may get for them.
  • Working hours. To be eligible, you must work at least a certain number of hours every week. Overtime is only considered if you work the hours on a regular basis.
  • Disability. Those receiving disability or illness benefits have more options.

What is Child Tax Credit?

A child tax credit is for people who look after any children who are entitled to child benefit (up to 31 August when they reach 16, or up to the age of 20 if they are in full-time education or enrolled with the careers service). Importantly, you are not required to do the job.

Child Tax Credit – Eligibility and Elements

To claim the child tax credit, you don’t have to work; instead, you must be responsible for at least one child or eligible young person. You do not have to be the child’s biological parent, but you must be their primary caretaker. If you work, however, you may be eligible to claim both the working tax credit and child tax credit at the same time.

The tax credit is made up of a number of different payments called ‘elements’. Depending on your family circumstances, you may be eligible for either the family element and kid element or a few other elements. How much you can get depends on your income, the number of children you have, and whether any of your children are disabled.

Child tax credit – maximum per element (the more you earn, the less you get)

  • Family element – the basic element for families with one or more children:

£545 (Max Annual Amount for 2021/22)

  • Child element: Per child:

£2,845 (Max Annual Amount for 2021/22)

  • Disabled child element: For each disabled kid who receives disability living allowance (DLA) who is registered blind or has been registered blind in the last 28 weeks:

£3,435 (Max Annual Amount for 2021/22)

  • Severely disabled child element: Each child is eligible for DLA’s highest rate care component. This is in addition to the child and disability elements:

£1,390 (Max Annual Amount for 2021/22)

How does the child tax credit work?

The child tax credit will be paid until your child turns 16 in September of the following year. If your child turned 16 on 1 June 2021, for example, your child tax credit would end on 1 September 2021. 

The only option to keep getting child tax credits after this is if your child is between the ages of 16 and 20 and is enrolled in full-time study or authorised training for which they are not paid. If they don’t have a job of 24 hours or more per week and have registered with their local careers service or Connexions service, 16 to 17-year-olds who aren’t in further education or training can also claim the child tax credit. However, you will be unable to claim if the young person is already receiving income support, disability benefit, employment support allowance, or tax credits.

Child Tax Credits – Income Thresholds

The highest amount of child tax credit is £16,480, depending on your income. The amount of tax credit you will receive drops by 41p for every £1 of income earned beyond this level every year. If you make more than this, the amount of child tax credit you get reduces.

What is Working Tax Credit

Working tax credit is a government subsidy that assists low-income workers with day-to-day expenditures. WTC is a payment made by HM Revenue and Customs to complement the earnings of low-wage workers who live in low-income households, whether or not they have children.

If you work a specific number of hours per week and earn less than a certain amount, you might get up to £2,005 in working tax credit in 2021-22, plus an additional one-time £500 payment as part of the government’s plans to mitigate the financial impact of the coronavirus pandemic.

Working Tax Credits – Eligibility and Elements

You get whichever aspects apply to you, and the amount of WTC you get once your income is taken into account may be decreased. If you earn more than £6,565, the amount of WTC you may receive will be reduced. Your maximum tax credit claim will be lowered by a percentage of your income beyond the threshold. From April 2021, the following factors and annual amounts will be used:

  • Basic payment £2,005 a year (plus there is a £500 one-off coronavirus support payment available)
  • A couple applying together Up to £2,060 a year
  • A single parent Up to £2,060 a year
  • Work at least 30 hours a week Up to £830 a year
  • Disability Up to £3,240 a year
  • Severe disability Up to £1,400 a year
  • Approved childcare Up to £175 a week for one child; up to £300 a week for two or more children

Working tax credit is available for periods when you are not working, such as while you are on maternity leave, unwell, or between jobs. Working tax credit is available for the first 39 weeks of maternity leave. To be eligible, you must have been employed and worked the required number of hours prior to taking leave.

How much you can get on tax credit

If you have any children or young people under the age of 16 born before 6 April 2017, you can collect up to £3,900 in child tax credits each year for your first child and up to £2,845 for each of your additional children until they turn 16. If they stay in authorised school or training, you can continue to claim until they are 20.

If you have a kid after 6 April 2017, you can only get child tax credits if it is your first or second child. There are several exceptions, such as if you’re expecting twins or triplets. Each youngster might get £2,845 per year.

You don’t have to work to earn child tax credits, but your circumstances determine the amount you get. HMRC considers the following factors when determining your claim:

  • your prior tax year’s income (what you earned for the 12 months up to 5 April)
  • How many children or young people in authorised education or training do you have in your household
  • when each of your children was born
  • If any of these children or young people have a disability

The amount of child tax credit you’ll get is determined by your income, how many children you have at home, and how much money you spend on childcare. If you have a disabled kid, you may be eligible for a higher child tax credit. You don’t have to work to get the child tax credit. 

In 2021-22, the basic amount of working tax credit is £2,005, although you may receive more or less. Your payouts are based on your earnings and the number of hours you work. If you have children, you may be able to get additional money since you’ll be eligible for the working tax credit’s childcare element. You may be eligible for the disability element working tax credit if you are a disabled worker.

A tax credits calculator[1] on the GOV.UK website can give you a very basic approximation of what you could get. There are also third-party calculators that may help you figure out if you are eligible for tax credits and other advantages.

Child Tax and Working Tax Credits

If you qualify for the child tax credit and in a job, you may be entitled to claim the working tax credit. You’ll be notified if you are eligible for a Working Tax Credit when you apply for a Child Tax Credit. You do not need to submit separate applications for them. Like a child tax credit, a working tax credit comprises numerous distinct components for which you may be qualified based on your circumstances. The childcare element of the working tax credit may be very beneficial to parents with children. This payment assists in defraying the costs of having someone look after your kid while you are at work.

Am I eligible?

If you’re eligible, you might be able to claim both the working tax credit and the child tax credit at the same time. You won’t know for sure what you’ll be eligible to claim until you’ve submitted a claim form to HMRC, but in general, the following conditions must apply to your situation.

You may be eligible for a one-off payment of £500 if you’re part of a working household that gets tax credits. When the temporary increase in working tax credit expires on 5 April 2021, the new payment will be issued to give additional support. If you were receiving either the working tax credit or the child tax credit on 2 March 2021 but did not get a payment because your income was too high, you may be eligible. 

However, the majority of people are no longer eligible for tax credits. You must apply for universal credit if you require income assistance for the first time or a new claim following a period when you were not claiming tax credits.

If you’re still getting tax credits, you can continue to receive them until your claim is transferred to the universal credit system. You can still lodge a new child tax credit claim if you get the severe disability premium or obtained it in the last month and are still eligible. However, you can no longer file a new claim for working tax credits.

How to claim tax credits?

Tax credits, however, cannot be claimed online. You must fill out a paper claim form, which is available from the tax credit helpdesk, in order to claim tax credits. You must also file a joint claim if you live with someone else. If you believe you may be eligible for any or both credits, you should file a claim as soon as possible. You might lose a lot of money if you don’t file your claim immediately.

Working Tax Credit is only available if you are already receiving it or if you are receiving Child Tax Credit. Universal Credit has taken its place for persons who have never claimed a tax credit.

HM Revenue & Customs is in charge of tax credits. Call the helpdesk on 0345 300 3900 or text phone 0345 300 3909 to submit a claim or report a change of circumstances. Lines are open from 8 a.m. to 8 p.m. every day. If you haven’t already claimed tax credits, your claim may only be backdated one month.

You can apply for Working Tax Credit if you have accepted a job offer, and the position is scheduled to start within the following seven days. The work must be expected to last at least four weeks from the moment the claim is filed.

In order to claim, self-employed Working Tax Credit applicants must first register with HMRC for Self-Assessment and give a Unique Tax Reference number. Those with income less than the equivalent of working 24 hours a week at the National Minimum Wage will have to prove to HMRC that the employment they are doing is legitimate and effective.

When do tax credits get paid?

You have the option of receiving your tax credits once a week or every four weeks. If you’ve submitted a new claim, it might take up to five weeks to be processed. While you wait, you’ll get an ‘award notification’ letter in the mail informing you of the day your first payment will be made. When there is a bank holiday, you will generally get paid early.

Renewing your tax credit

Every year, you’ll need to renew your tax credit. Between April and June, you’ll receive a renewal pack in the mail, which you must either fill out and return or phone the Tax Credit Office by 31 July. Tax credits, unlike other benefits, usually need to be renewed by 31 July each year to continue receiving payments from HMRC. You’ll get a renewal pack in the mail between April and July if you already claim tax credits. The dates for the year are determined by the tax year, which runs from 6 April to 5 April the following year. As a result, your pay in 2021-22 will be determined by your earnings in 2020-21.

If you currently receive tax credits, you may also be liable to a retrospective adjustment from past years. You must ensure that all of your information is accurate and current. If you don’t, you may be responsible for any overpayments you get as a result of HMRC holding incorrect information about you. Not everyone is required to renew their tax credits every year; HMRC will notify you. The renewal process is essential because your previous year’s earnings determine the amount of money you’ll receive.

If you have changes and miss the deadline, you risk overpayments or underpayments. If something changes that impact your tax credits, you must notify the tax credit office as soon as possible; otherwise, you may find yourself owing money to the tax credit office – at the very earliest, you should notify the tax office when you get your annual renewal pack.  The tax credit office may contact you from time to time to see if your circumstances have changed. 

Because payments are anticipated from last year’s income, yet cover this year’s working hours. So, if circumstances change, for example, your income may have altered due to the coronavirus, and you don’t inform them, you may be underpaid or overpaid.

Universal Credit Replacement

Universal Credit is a new benefit model that will gradually replace the working tax credit and the child tax credit, as well as several other means-tested benefits. Because Universal Credit is being phased across the country, you may have already been shifted to it or will be shortly. Your claim for Tax Credits will expire when you apply for Universal Credit, and your identification is validated. 

Everyone on tax credits will be moved to universal credit in the future when HM Revenue & Customs tells you that you need to file a universal credit claim. If your universal credit award is less than your tax credits, you’ll get top-up payments once you’ve made the switch. The top-ups will continue until your circumstances change and you file a new claim.

Depending on where you live, it will happen eventually. If you already get Universal Credit, you won’t be able to apply for working tax credit since the payments you’d get would be included in your Universal Credit payment. Before you get your first Universal Credit payment, your Tax Credits can stop being issued. If this happens, you can request a cash advance to help you get by until your first payment arrives. The only exceptions to Universal Credit are if you have three or more children or if you or your spouse has reached pension credit eligibility age.

You can also find out more about tax credits on GOV.UK. If you have further questions, please use the contact form to contact our advisory team or phone us for professional help at Bloom financials.