What Are Tax Credits?

Tax Credits are a form of financial support from the UK government designed to help individuals and families with low to moderate incomes. They are managed by HM Revenue and Customs (HMRC) and come in two main types: Working Tax Credit and Child Tax Credit. Though these benefits are being gradually replaced by Universal Credit, many people still receive them and understanding how they work can help you manage your finances more effectively.

Types of Tax Credits

There are two types of tax credits available in the UK:

1. Working Tax Credit: This is aimed at individuals and families who are in work but earn a low income. It provides financial support to supplement earnings and helps reduce financial pressure for working households.

2. Child Tax Credit: This credit provides financial assistance to families who are responsible for children under a certain age. It is designed to support families with the cost of raising children and is available regardless of whether the parent is employed or not.

What Is Working Tax Credit?

Working Tax Credit is a benefit designed to provide financial help to people on a low income, whether they are employed or self-employed. The amount of Working Tax Credit you are entitled to depends on your income, hours worked, and circumstances.

Key Elements of Working Tax Credit:

• Basic Element: Available to all eligible claimants.

• Additional Elements: Extra amounts for individuals working more than 30 hours per week, those with a disability, or those with children in childcare.

Who Qualifies for Working Tax Credit?

To be eligible for Working Tax Credit, you must:

• Be at least 16 years old.

• Work a certain number of hours per week (at least 16 to 30 hours depending on your circumstances).

• Have an income below a certain threshold.

Working Tax Credit is particularly important for families with children, as it helps them meet the cost of living while maintaining employment.

What Is Child Tax Credit?

Child Tax Credit is aimed at families with children to help cover the costs of raising them. Unlike Working Tax Credit, you don’t have to be employed to qualify for Child Tax Credit. It is available to families with children or young people under 20 who are in full-time education or training.

Key Elements of Child Tax Credit:

• Family Element: Paid to most families who qualify.

• Child Element: Paid for each child in the family.

• Additional Elements: Additional payments for children with disabilities.

Who Qualifies for Child Tax Credit?

To qualify for Child Tax Credit, you must:

• Be responsible for at least one child under the age of 16, or under 20 if they are in full-time education or approved training.

• Have an income below a certain threshold (this threshold varies depending on how many children you have and your other circumstances).

Child Tax Credit can be paid in addition to Working Tax Credit if you meet the criteria for both.

How Are Tax Credits Calculated?

The amount you receive in tax credits is based on your household income and circumstances. The more you earn, the lower your tax credits payment will be. HMRC uses your previous year's income to calculate your current tax credit entitlement, though you can report changes in income if they significantly affect your claim.

Factors affecting tax credit amounts include:

• Income level.

• Number of children.

• Number of hours worked.

• Childcare costs.

• Whether anyone in the household has a disability.

The amount of tax credits is reduced if your income exceeds a certain threshold. Currently, tax credits are withdrawn at a rate of 41p for every £1 earned above this threshold.

Transition to Universal Credit

Tax Credits are gradually being replaced by Universal Credit, a broader system designed to simplify and integrate multiple benefits into one payment. If you’re already claiming tax credits, you don’t need to take any immediate action unless your circumstances change. However, new claims for tax credits are no longer accepted, and new applicants must apply for Universal Credit instead.

Differences Between Tax Credits and Universal Credit:

• Monthly Payments: Universal Credit is paid monthly, unlike tax credits which are typically paid weekly or every four weeks.

• Real-Time Income Adjustments: Universal Credit adjusts payments based on your current income, while tax credits are based on the previous year’s income.

• Single Payment: Universal Credit combines multiple benefits into a single payment, simplifying the welfare system for many claimants.

How to Claim Tax Credits

You can no longer make a new claim for tax credits, but if you’re already receiving them, you need to renew your claim every year. HMRC will send you a renewal pack, which you must complete by the deadline (usually 31 July each year) to continue receiving payments.

If you fail to renew your tax credits, your payments will stop, and you may have to repay any amounts you received after the deadline.

What Happens if You Receive Too Much Tax Credit?

Overpayments can occur if you’re paid more tax credits than you’re entitled to, often because of changes in income or circumstances that weren’t reported to HMRC. If you’ve been overpaid, HMRC will ask you to repay the amount, either by reducing your future payments or by requesting direct repayment.

Frequently Asked Questions about Tax Credits

1. Can I receive both Working Tax Credit and Child Tax Credit?

Yes, you can receive both if you meet the criteria for each. Child Tax Credit is based on your responsibility for children, while Working Tax Credit is based on your employment status.

2. How is income assessed for tax credits?

HMRC assesses your household income from the previous tax year. However, if your income changes significantly, you should inform HMRC to avoid overpayments or underpayments.

3. What if my circumstances change?

You must report any significant changes in your circumstances to HMRC, including changes in income, working hours, or household members. Failure to do so could result in overpayment, which you would need to repay.

4. What happens if I do not renew my tax credits on time?

If you don’t renew your tax credits by the 31 July deadline, your payments will stop, and you may have to repay any money received after this date.

5. What happens when I switch to Universal Credit?

If your circumstances change, or if the government’s managed migration to Universal Credit applies to you, your tax credits will stop, and you will receive Universal Credit instead.

Conclusion

Tax Credits are a vital form of financial support for working families and those with children. However, they are gradually being phased out in favour of Universal Credit. For those still receiving tax credits, it’s essential to keep up-to-date with income changes and renew your claim annually to avoid overpayments or interruptions to your payments.

For new claimants, Universal Credit is the only option, and it comes with its own set of rules and benefits. Understanding both systems can help you manage your financial situation more effectively and ensure you receive the support you’re entitled to.