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‘Can you explain tax credits to me?’:
Full tax credit calculation: "Toni"

icon-example1.jpgToni 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).

Maximum Child Tax Credit

  • 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)

Childcare element of Working Tax Credit

Toni has to pay an average of £340 per week for the childcare for her three children.
  • The yearly amount would be about £17,729 (340 divided by 7 and multiplying by 365)
  • Because this is more than £15,643, Toni has to pretend the £17,729 is £15,643
  • Her childcare element is therefore about £10,950 (70% of £15,643)

Maximum Working Tax Credit

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

Relevant Income

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

The calculation

  • 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 to be paid towards childcare (£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 266 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): £6,194 (£8,522 x 266 divided by 366)