Childcare costs and changes for tax credits

Issue 198 (June 2007)

Alison Gillies looks at how to work out childcare charges for working tax credit and how to identify when there has been a relevant change.

Introduction

The starting point is eligibility for working tax credit (WTC): if the claimant is not eligible for WTC they cannot get help with childcare costs through the tax credit system. In addition, they must be either a lone parent, or part of a couple where both are working at least 16 hours per week, or one is working and the other is incapacitated, in hospital or in prison.1 The childcare costs must be paid to a registered or approved provider and be in respect of a child aged under 15, or under 16 if the child is disabled.2

Calculating the childcare element

If they get over this first hurdle, the burning issue for claimants is how much help, if any, they will actually get towards their childcare costs. This depends on the interaction between the actual costs of childcare (the relevant childcare charges), the capping mechanism and the overarching means-test which applies to tax credits.

Relevant childcare charges are calculated by averaging out costs to achieve a weekly figure.3

Where there is a fixed weekly charge, the weekly figure is calculated by averaging the costs for the previous four weeks. Where there is a fixed monthly charge, the weekly figure is calculated by multiplying the monthly charge by 12 and dividing by 52.

Where there is a varying charge, costs are averaged over the previous 52 weeks. This can include periods where there are no childcare costs at all (e.g., a claimant who incurs costs during school holidays but not during term time).

Example

Childcare costs are £70 a week during 10 weeks of school holidays, and nothing during term time (42 weeks). Relevant childcare charges:

70 x 10 divided by 52 = £14 (rounded up to the nearest 52 pound)

Where none of these methods is possible (e.g., where childcare provision has only recently started), the relevant childcare charge can be estimated by reference to the anticipated cost. Any amount of childcare which is covered by a subsidy or voucher does not count as a relevant childcare charge.

The childcare element is 80 per cent of the relevant childcare charges, capped at 80 per cent of £175 if there is one child in relevant childcare, or 80 per cent of £300 if there are two or more. This absolute ceiling can clearly work to the disadvantage of claimants with more than two children in childcare. In addition, while the extension of the childcare element up to age 16 for disabled children acknowledges their potentially greater need for care, there is no relaxation of the financial ceiling in such cases.

The childcare element is the maximum amount of help a claimant can get with the costs of childcare. The tax credits means-test means that claimants may get the whole element, part or none of it depending on the level of their income.

Changes in childcare costs

A change in total relevant childcare charges of less than £10 a week (either up or down) has no impact on tax credit entitlement. It does not constitute a relevant change of circumstances.4

Changes of £10 or more a week do make a difference, but increases and decreases are treated differently both in terms of the claimant's responsibility to tell the Revenue, and in terms of when the change starts having an impact on entitlement.

Costs decrease by £10 or more, or stop

If childcare costs go down by £10 or more a week, or cease, the claimant must inform the Revenue. The time limit for doing so is one month from the date of the change, or the date the claimant became aware of the change.5 There is a potential penalty of up to £300 for failure to comply.6 Tax credit entitlement is recalculated from the first Sunday following the four consecutive weeks (Sunday to Saturday) in which the change occurs.7

Costs increase by £10 or more

Although this is not a change of circumstance which must be notified within a specified time limit, and there is no potential penalty for failing to do so, claimants should tell the Revenue within three months if childcare costs go up by £10 or more a week. If the change is reported within three months, tax credit entitlement will be changed from the first day of the week (Sunday) in which the change occurred. If the change is reported outside three months any resultant increase in entitlement can only be backdated for three months.8

Relevant change of circumstances

If the claimant has a fixed weekly or monthly charge, it will usually be clear when there has been a relevant change to the childcare charges. For example, the childcare provider increases their charge, or the number of hours required increases or decreases. In this situation, the claimant should consider what the costs will be over four weeks, or, if paid monthly, work out the weekly figure by multiplying the monthly charge by 12 and dividing by 52.

Where there are fluctuating childcare costs, it is important to remember that, if a change in costs has already been taken into account in the 'averaging' process, it is not a relevant change for this purpose.

Example

Childcare costs are £50 during term time (42 weeks), but zero during summer, Easter and half-term holidays (10 weeks). Childcare costs have been calculated as £41 a week:

50 x 42 divided by 52 = 40.38 (rounded up to the nearest pound)

When the summer holidays start and costs go down to zero, this is not a relevant change. In order to work out whether there has been a relevant change where costs fluctuate, the claimant has to average out what s/he anticipates the charges will be over the next 52 weeks.

Pinpointing exactly when a relevant change has occurred, and therefore when the time limit for reporting begins and ends, is not as straightforward as it ought to be. The regulations suggest (but don't make entirely clear) that there is a distinction between situations where there is a fixed weekly charge, and other situations, for example, a monthly charge or a variable charge. This is borne out by the Revenue's Claimant Compliance Manual.9 Where there is a fixed weekly charge, the relevant change occurs after the fourth week of the new charge. The one-month time limit to report the change runs from the end of this four week period. However, if there is a fixed monthly charge, or if there are variable charges, the time limit runs from the actual date of change (or the date the claimant becomes aware of the change).

Alison Gillies is a welfare rights worker at CPAG in Scotland.


Please be aware that welfare rights law and guidance change frequently. Therefore older Bulletin articles may be out of date. Use keywords or the search function to find more recent material on this topic.

  • 1. Reg 13 WTC (Entitlement and Maximum Rate) Regulations 2002 SI No. 2005 ('WTC EMR Regs')
  • 2. Reg 14 WTC EMR Regs
  • 3. Reg 15 WTC EMR Regs
  • 4. Reg 16 WTC EMR Regs
  • 5. Reg 21 Tax Credits
  • 6. s32 Tax Credits Act 2002
  • 7. Reg 16 WTC EMR Regs
  • 8. WTC EMR Regs
  • 9. Claimant Compliance Manual para 6315