CPAG in Scotland Tax Credits Project: Factsheet 6

Tax credits – the basics

Introduction
Claiming tax credits
Who qualifies for tax credits
How much do you get
How income affects your award
How overpayments affect your award
Changes in circumstances
Further information and advice

Introduction

This factsheet explains the basic qualifying conditions for tax credits and how the system works. The tax credit system aims to support:

• Families with children, whether in work or not
• Working people who are disabled
• Older workers
• Low-income workers

Tax credits can also help with childcare costs for working families.

Claiming tax credits

Claim tax credits on form TC600 available from the Tax Credits Helpline (0845 300 3900, text phone 0845 3003909). If you are also claiming income support, employment and support allowance or jobseeker’s allowance, you can make a fast-tracked claim for tax credits at the Jobcentre Plus office.

You make a joint claim ie, you both claim together, if you are married or registered civil partners or are living together as though you were married or civil partners. You make a single claim if you are not a member of a couple.

The Revenue checks that you pass the qualifying conditions and applies an income test to see if you are due an award.

Your claim needs to be renewed each year. Annual Review and Declaration forms are sent out after the end of the tax year in April. These forms ask you to confirm your income and circumstances for the previous year. The forms also renew your claim for the year ahead. (See CPAG in Scotland factsheet Tax Credits Annual Review for more details.)

Who qualifies for tax credits

There are different qualifying conditions for child tax credit (CTC) and working tax credit (WTC). You may qualify for CTC or for WTC or for both together.

Child tax credit

• You must be at least aged 16
• You must be responsible for a child (or children)
• You must pass the residence and immigration tests (see below)

You can claim for a child under the age of 16. If the child leaves school at 16, you can claim until 31 August after their 16th birthday (sometimes longer if a 16 or 17-year-old registers with the Careers Service). If the child stays on at school or full-time, non-advanced education or certain kinds of training, you can usually claim until they leave, but not beyond their 20th birthday. For more information, see CPAG in Scotland’s factsheet Parents Claiming for Young People in Further Education or Training [120 KB pdf file].

If your child lives in two households and two people want to claim for the child, you can decide between you who makes the claim. If you cannot agree, the Revenue will choose for you based on who they think has main responsibility.

Working tax credit
You qualify if you pass the residence and immigration tests (see below) and you pass any one or more of the following five conditions.

• Responsible for a child
  – You are aged 16 or over,
  – Work at least 16 hours a week, and
  – Are responsible for at least one child (under the same rules as for CTC)
  
• Disabled worker
  – You are aged 16 or over,
  – Work at least 16 hours a week, and
  – You have a disability that is listed in the notes that come with the tax credits claim form, and
  – Get disability living allowance (or another disability benefit listed in the notes) or you were getting at some time in the last 26 weeks before your claim one of the following:
• short-term higher rate or long-term incapacity benefit or
• employment and support allowance for at least 28 weeks weeks (including periods on statutory sick pay) or
• a disability premium or
• severe disablement allowance.

(There is also a way to qualify for some people returning to work on reduced pay after 20 weeks of limited capability for work – see CPAG in Scotland’s leaflet Tax credits for disabled workers for more information.)

For couples, the person with the disability must work 16 hours or more to qualify under this condition

• Aged 25 or over
  – You are aged 25 or over, and
  – Work at least 30 hours a week
  
• Aged 50 or over
  – You are aged 50 or over, and
  – Are returning to work of at least 16 hours a week after 6 months on benefits
  (Eligibility for WTC under this rule only lasted for 12 months, but the Government has announced that this 50 or over condition is to be abolished from 6 April 2012, so entitlement would end on that date in any case, unless you also pass one of the other conditions.)
• Aged 60 or over
  – You are aged 60 or over, and
  – Work at least 16 hours a week
  (This condition was introduced from 6 April 2011 and is not time limited in any way.)
  

Help with childcare costs is provided through a childcare element of WTC. To get this help, you must first pass one of the WTC qualifying conditions described above, and meet the specific childcare element rules outlined in the table below.

The work you do must be paid work, either employed or self-employed, and be expected to last for at least 4 weeks. You can sometimes be treated as though you were in work even when you are not e.g., for the first 39 weeks of maternity leave, or for the first 28 weeks off work sick (you usually need to be getting a sickness or incapacity benefit or employment and support allowance or National Insurance credit).

Residence and immigration tests
You must be present and ordinarily resident in the UK. You can still get tax credits for the first 8 weeks (sometimes 12 weeks) of a temporary absence abroad. If you are a ‘person subject to immigration control’, you usually cannot get CTC or WTC unless you are claiming jointly with a partner who is not subject to immigration control. A ‘person subject to immigration control’ is someone whose leave to enter or remain in the UK is subject to a public funds restriction, or who does not have the required leave or who is a sponsored immigrant. For CTC, you must also have a ‘right to reside’ – see CPAG in Scotland factsheet Tax credits for people from abroad.

How much do you get

If you meet the qualifying conditions for CTC or WTC or both, the amount you get depends on

• Which elements you are entitled to
• How much income you have
• Whether an overpayment is being deducted

Which elements are you entitled to
Tax credit awards are made up of a number of elements. Adding together the elements for your circumstances gives you the maximum tax credits award.

If you are on income support, income-based jobseeker’s allowance, income-related employment and support allowance or pension credit you get the maximum award. You can use the chart below to work out the weekly amount of the maximum award. You might get less than this if the Revenue is recovering a previous overpayment (see below).

If you are not on these benefits, your award may be reduced to take account of your income (see below).

How income affects your award

While you get income support, income-based jobseeker’s allowance, income-related employment and support allowance or pension credit, your award is maximum tax credits (the total of all the elements above that you are entitled to). There is no further income test.

Otherwise, you get maximum tax credits if your income for the year is at or below a set threshold: £6,420 if you are eligible for WTC elements only or together with CTC elements, or £15,860 if you are entitled to CTC elements only and not to WTC (2011/12 rates). If income is above the threshold, your award is reduced.

What income counts
The income that counts is your taxable benefits, gross earnings from employment, taxable profits from self-employment, pension income, savings income and other taxable income. Income from savings or pensions (and a few other sources) only counts if it is over £300 a year in total; the first £300 is ignored.

Both your incomes count if you are claiming jointly as a couple. Rules on what counts as income can be complex, so check the notes that go with your tax credit form and seek advice if you are unsure.

There is no limit on the savings or capital you can have, and no reduction to your award, except that interest and other income earned from the capital is taken into account.

Your income figure needs to be for the whole tax year (6 April in one calendar year to 5 April in the next). If you are an employee, you should receive a year-end statement of income from your employer (form P60). The figure to use for tax credits is your gross income before tax and National Insurance. If you get benefits, the DWP should give you a statement of taxable benefits at the end of the tax year. Not all benefits are taxable so not all benefits count as income for tax credits. If you are self-employed, you normally use the figure from your self-assessment tax return.

Which year’s income counts
To decide whether you are below or above the threshold and how much your award should be, the Revenue uses either the previous year’s income (the tax year, 6 April to 5 April, before your award begins) or the current year’s income (the tax year in which your award is made).

When you first claim, you are asked for details of previous year’s income and this is what your award is based on. But the award can change if current year’s income is lower, or in some cases, higher. When your annual award comes to an end in April, the Revenue asks you for details of current year’s income and makes a comparison with previous year’s income.

• If current year’s income is lower than the previous year’s, your award is based on current year’s income (but the Government has announced that a disregard of £2,500 will be applied to falls in income from April 2012)
• If current year’s income is higher than previous year’s, but not by more than than a disregarded amount, your award is still based on previous year’s income
• If current year’s income exceeds previous year’s by more than the disregarded amount, your award is based on current year income minus the disregarded amount

The disregarded amount for an increase in income in 2010/11 was £25,000, so this is the amount used when comparing income in 2010/11 with 2009/10.

The disregarded amount for an increase in 2011/12 is £10,000 so this is the amount used when comparing income in 2011/12 with 2010/11.

You should not wait till the end of the year to tell the Revenue if current year’s income is going to be lower or higher than previous year’s. If you tell the Revenue as soon as possible, they can reassess your award straight away. This reduces the risk of being over or underpaid.

If current year’s income exceeds previous year’s by less than the disregarded amount this does not affect your award in the current year but does affect it the year after, starting from 6 April. The process of renewal can take a few months so do not wait until you get the Annual Declaration forms but tell the Revenue straightaway so they know how much to pay you from 6 April.

Giving an estimate
If you give the Revenue an estimate of this year’s income and they base your award on it, you should keep them informed if your estimate turns out to be wrong. Bear in mind that the £25,000 disregard only applies to increases in income this year compared with last year. If your actual income this year turns out to be higher than the estimate of this year’s income the Revenue has based your award on, you could have an overpayment to repay.

How overpayments affect your award

If you have been overpaid tax credits, the Revenue will seek to recover this from you by reducing your award or, if you are no longer entitled to tax credits or you are in a different household, by asking you to repay it directly. If the overpayment was the fault of the Revenue and you claimed correctly, checking your award and notifying any changes or errors, it should not be recovered. If recovery causes you hardship, you can ask them to write off the overpayment or recover it at a lower rate. See CPAG in Scotland's factsheet Tax credits overpayments for more information about how to go about challenging an overpayment and for details of how much the Revenue can deduct from your award to pay back an overpayment.

Changes in circumstances

Keep the Revenue informed of changes in circumstances and income. This will help you avoid being underpaid or overpaid tax credits.

You must tell the Revenue when

• You stop being part of a couple, or start being part of a couple
• Your childcare costs stop or go down by £10 or more per week for 4 weeks in a row
• You stop working at least 16 hours per week
• You stop working at least 30 hours per week
• You stop being responsible for a child or young person
• A child or young person dies or stops qualifying for support (eg, when they leave education or training)
• You leave the UK permanently, or for more than 8 (or sometimes 12) weeks
  
• For child tax credit, you lose the right to reside in the UK

The Revenue has the power to impose a £300 penalty if you fail to notify these events within one month.

The Revenue has a checklist of other changes you should look out for (form TC602(SN) available at www.hmrc.gov.uk). If circumstances change that increase the maximum tax credits you could get, you should notify the Revenue as soon as possible. Increases can usually only be backdated for up to 3 months.

Passported benefits
As a tax credit claimant you can also get the following help (if you also meet other conditions of entitlement).

Health benefits (dental treatment, sight tests and glasses) – If you get CTC, or both CTC and WTC, or WTC that includes a disability or severe disability element and in each case your annual income for tax credit purposes is £15,276 or less.

Healthy Start Scheme (Free vitamins and vouchers for milk, fruit or vegetables if you have a child under 4 or are pregnant) – If you get CTC and your annual income for tax credit purposes is £16,190 or less and you are not entitled to WTC (except for during the four-week run-on after stopping work).

Social fund maternity and funeral grants – If you get CTC of more than the family element (£545 a year) or WTC which includes a disability or severe disability element

Free school lunches – If you get CTC and you do not get WTC and your annual income for tax credit purposes is £15,860 (2011/12 rate) or less; or if you get CTC and WTC and your annual income for tax credit purposes is £6,420 or less (2011/12 rate), or during the four-week run-on after stopping work. From August 2010, the Scottish Government agreed to extend free school lunches to all Primary 1-3 pupils, but councils have some flexibility on how and when they implement this policy.

Further information and advice

CPAG in Scotland Tax Credits Project summary webpages

Child Poverty Action Group in Scotland
0141 552 0552 advice line for advisers on benefits and tax credits,
Monday to Friday 10am to 12pm

Email: advice@cpagscotland.org.uk
email advice for advisers on benefits and tax credits

Website: www.cpag.org.uk
for more tax credit factsheets from CPAG in Scotland

CPAG publishes the Welfare Benefits and Tax Credits Handbook, a comprehensive guide to benefits and tax credits for claimants and advisers.

CPAG in Scotland’s advice line is only for advisers. If you are having problems with your own tax credit or benefit claim and are in need of advice you should contact your citizens advice bureau or other local welfare rights service.

HM Revenue and Customs
Tax Credit Helpline 0845 300 3900
(textphone 0845 300 3909)

Website: www.hmrc.gov.uk

© Child Poverty Action Group, April 2011

Child Poverty Action Group is a charity registered in England and Wales (registration number 294841) and in Scotland (registration number SC039339). Company limited by guarantee registered in England (registration number 1993854). Registered office: 94 White Lion Street, London N1 9PF

CPAG in Scotland’s Tax Credit Project is funded by the Scottish Government.

This factsheet was last updated April 2011