Tax Credits - calculations

There are online calculators that will work out your tax credit entitlement for you: for example, Her Majesty’s Revenue & Customs has one at www.hmrc.gov.uk/taxcredits/payments-entitlement/entitlement/question-how-much.htm . That’s great, but they don’t normally tell you how the numbers are worked out. This page is designed to help you understand how it all works, and to do calculations about your situation that you can understand. Knowledge is power!

But first, an important warning

If you want to get your tax credit calculations exactly right, you need to take into account of the fact that yearly amounts are scaled down to daily amounts, rounded up to the nearest whole penny, and they scaled up again. To make things easier to understand I ignore this complication in this website. The difference, in my opinion, is too small to be worth worrying about: for example, for a family with two non-disabled children the difference would be £1.00 over a whole year. However if you use my approach and your answers don’t exactly match the ones in the Tax Credit Office letters, this is why.

The tax credit calculation in a nutshell

Work out your Maximum Child Tax Credit for the year - this figure depends on how many children you have, and if any of your children are disabled (obviously if you have no children you’re not entitled to any Child Tax Credit at all).
Work out you Maximum Working Tax Credit for the year - this figure depends on whether your part of a couple, or a single parent, or neither, whether you work 30+ hours week or not, whether (in some circumstances) you or your partner are disabled, and on your childcare costs, if you have any (if you’re not classed as being in full time work you’re not entitled to any Working Tax Credit at all).
If you are getting Income Support, income based Jobseeker's Allowance, income based Employment and Support Allowance, or Pension Credit, that’s it! You get the Maximum Child Tax Credit and the Maximum Working Tax Credit.
If you’re not getting one of these benefits, work out what your Relevant Income is for the year.
Compare your relevant income to a figure called the Income Threshold for the year- this amount is fixed and depends only on which tax credits you are claiming.

If your Relevant Income is less than the Income Threshold, you get the maximum Child Tax Credit and the maximum Working Tax Credit.
If your Relevant Income is the same as the Income Threshold, you get the Maximum Child Tax Credit and the Maximum Working Tax Credit.
If your Relevant Income is more than the Income Threshold, your tax credit entitlement is reduced from the maximum by 41% of the difference.

Finally remember that we have worked out annual figures. So

⁃ If you claim didn’t start at the beginning of the tax year, scale the amount down accordingly.
⁃ If you want to know how this works out as a weekly figure, divide the annual amount by 365 and multiply it by 7.

That’s it!

Now the detail…

How to work out your Maximum Child Tax Credit

Start with £545 (the family element).
Add £2,780 for each child or young person (the child element).
Add another £3,140 for each child or young person who gets Disability Living Allowance or Personal Independence Payment, or is registered blind (the disabled child element): you still get this if the child is in hospital, or stopped being registered blind in the last 28 weeks.
Add another £1,275 for each child or young person who gets the highest rate of the care component of Disability Living Allowance or the enhanced daily living component of PIP (the severely disabled child element): again, you still get it if the child is in hospital.

The exact rules about who counts as a child or young person are complicated, but as a general rule, if you get Child Benefit for a child or young person you can count them for Child Tax Credit.

Toni is a single parent and has three children: Jason (8), Wayne (11), and Sharon (13). She gets Child Benefit for all of them. Wayne is disabled, and she gets Disability Living Allowance for him (higher rate mobility and middle rate care).

Start with £545
Add three ‘child elements’ (£2,780 + £2,780 + £2,780 = £8,340)
Add the ‘disabled child element’ (£3,140)
Don’t add the severely disabled child element because Wayne doesn’t get the highest rate of the care component of Disability Living Allowance.
Toni’s Maximum Child Tax Credit is therefore £12,025 (£545 + £8,340 + £3,140)

How to work out your Maximum Working Tax Credit

Start with £1,960 (the basic element).
If you’re a couple, add £2,010 (the couple element)
If you’re a single parent, add £2,010 (the lone parent element).
If you normally work 30 hours or more a week add £810 (the thirty-hour element)(if you’re a couple, you get this if your total hours between you are 30 of more, provided also that one of you works at least 16 hours per week (so if you both work 15 hours per week you can’t get this)).
If you are classed as a disabled worker add £2,970 (the disabled worker element). Working out if this applies to you is complicated: click here if you want to know more about this.
If you or your partner get the highest rate of the care component of Disability Living Allowance, or the higher rate of Attendance Allowance, or the enhanced daily living component of Personal Independence Payment, add £1,275 (the severe disability element): if both of you qualify you get two of these (i.e. £2,550).
If you have childcare costs, click here to see if you are entitled to the childcare element and, if you are, how much you are entitled to.

Back to Toni. She works for 35 hours per week. She is not disabled. I have worked out her childcare element as £10,950 (click here to see how I've done this).

Start with £1,960 (the basic element)
Add £2,010 (the lone parent element)
Add £810 (the thirty-hour element)
Add £10,950 (the childcare element)
Toni’s maximum Working Tax Credit not including the childcare element is £4,780
Toni’s maximum Working Tax Credit including the childcare element is £15,730

If you are getting Income Support, income based Jobseeker's Allowance, income based Employment and Support Allowance, or Pension Credit…

…You get the Maximum Child Tax Credit and the Maximum Working Tax Credit.

Otherwise, you need to carry on…

How to work out your relevant income

Remember that the Tax Credit Office based its initial award on your income from the previous year. Then, when you get to the end of the year, they finalise your award based on your actual income for the year. As the purpose of this page is to show you roughly what your entitlement is likely to be I suggest you use the income you actually expect to get this year, but be aware that if this is very big difference between that and your previous year’s income your provisional tax credit award may quite different from your calculated figures too.

The Tax Credit Office use something called your ‘relevant income’ for the calculation: this is nearly the same as your taxable income, that is to say all the income that gets taken into account when your income tax is worked out. Note the following:

It is your gross income (your income before tax is taken off)
Most benefits are not taxable so can be ignored, but some benefits are taxable: the main taxable benefits are contributory Jobseeker's Allowance, contributory Employment and Support Allowance, Incapacity Benefit, Carer’s Allowance, and Bereavement Allowance
Unlike other means-tested benefits savings and other capital do not themselves reduce your entitlement. However taxable income that you get from these (for example, interest) does get taken into account. Having said that, the first £300 a year is ignored, so you need quite a lot of capital for this to be a problem!
Some taxable income is ignored: for example, and importantly, any contributions you make to a personal or occupational income are ignored

Toni’s gross annual income is £25,000 a year. She pays £1,000 a year from her earnings into a pension fund, though, so we can treat her earnings as £24,000. She doesn’t get any taxable benefits. She does have £5,000 savings but this give a lot less interest than £300 per year.

Toni’s annual relevant income is therefore £24,000

How to work out your entitlement

Compare your relevant income with the threshold figure that applies to you:

If you are only entitled to Child Tax Credit, your threshold is £16,010
If you are only entitled to Working Tax Credit, your threshold is £6,420
If you are entitled to both Child Tax Credit and Working Tax Credit, your threshold is £6,420

If your income is less (or equal to) than your threshold figure, you are entitled to the Maximum Child Tax Credit and the Maximum Working Tax Credit.

If your income is more than your threshold figure:

Take the difference between the two and multiply this by 41% (multiply by 41 and divide by 100): we’ll call the result of this ‘the Taper’
Reduce your tax credit award by the Taper

The way you reduce your award is as follows:

You reduce your Maximum Working Tax Credit apart from the childcare element, which you don’t touch.
If you have any of the Taper 'left over', reduce the childcare element of the Maximum Working Tax Credit.
If you have any of the Taper left over after this, reduce the Maximum Child Tax Credit apart from the family element, which you don’t touch (yet).
If you still have any of the Taper left over, reduce the family element.

Toni is entitled to both Child Tax Credit and Working Tax Credit, so her threshold figure is £6,420.
The difference between her relevant income and the threshold is £17,580 (£24,000 minus £6,420).
The taper is therefore about £7,208 (£17,580 x 41%).
As Toni’s Maximum Working Tax Credit apart from the childcare element is £4,780 this is completely eaten up by the taper, which leaves £2,428 (£7,208 minus £4,780).
This remaining bit of £2,428 eats into the childcare element of the Maximum Working Tax Credit but doesn’t use it all up, leaving £8,522 left (£10,950 minus £2,428).
As none of the taper is left over now, the maximum Child Tax Credit is not affected (hurray).

Let’s see where this leaves Toni

Her actual Child Tax Credit is the same as her Maximum Child Tax Credit: £12,025 per year
She doesn’t get any Working Tax Credit, except for £8,522 towards her childcare per year
This works out as about £230 per week Child Tax Credit, and about £163 per week childcare costs (compare this with her actual childcare costs of £340…)

Just for completeness, let’s suppose she actually applies for tax credits in August, 100 days into the tax year (so there’s only 265 days left). Her provisional award letter should therefore tell her that she is entitled to the following amounts for that tax year:

Child Tax Credit: about £8,739 (£12,025 x 266 divided by 366)
Working Tax Credit (childcare): £6,193 (£8,522 x 266 divided by 366)

In case you want to see all of Toni’s calculations in one place, click here.

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