A SIMPLE GUIDE TO CHILD TAX CREDITS
This is a basic guide. It should not be used as a definitive guide, since individual circumstances may differ, in which case specific advice should be obtained, where necessary. There are two main tax credits:
- working tax credit, available to working people on low incomes,
- and child tax credit, which is for people with children, whether they are working or not.
Prior to 6 April 2012, the basic element of child tax credit was protected up to a family income level of £40,000 but this has now been removed. Child tax credits are now tapered away much earlier. The child tax credit calculation is very complicated. However, HMRC have a tax credit calculator on their website at http://taxcredits.hmrc.gov.uk/Qualify/DIQHousehold.aspx which enables people to check their entitlement. From 6 April 2012, the backdating provisions have been shortened to one month., so it is important to take prompt action to ensure credits due are not lost. It is possible to make a protective claim where a person is not eligible because their income is too high, but would otherwise meet the criteria. This gives them an identity for tax credit purposes and means that if their income falls, they may be entitled to tax credits recalculated to the start of the tax year, whereas if they do not claim until income does fall, the claim can only be backdated for one month. Tax credit applications have to be joint applications if the claimant is part of a couple. Child tax credit is made up of several elements: Maximum annual rate Element 2012-13 Family element £545 Child or young person element £2,690 Disability element – where the child or young person is disabled** £5,640 Severe disability element – where the child or young person is severely disabled** £6,830 *The child or young person elements, including the higher amounts in respect of disability or severe disability, are mutually exclusive: one element, the highest for which the child or young person qualifies, will be payable for each child or young person. The renewal deadline is 31 July. At the start of the tax year, tax credits are paid on a provisional basis, based on the previous year’s income and will be finalised and recalculated after the year end. If income has increased, tax credits will only be recalculated if the increase is more than £10,000 (£25,000 for years prior to 2011-12). A disregard of £2,500 for income falls has been introduced from 6 April 2012. Self employed income for this purpose will be the taxable profit for the tax year. If a loss is made, it will be set against any other income for that year, including that of any joint claimant. Losses carried back against the previous year’s income for income tax purposes will be treated differently for tax credit purposes. For tax credits, any loss will be set against other income in the same year, and any not so utilised can be carried forward. A capital allowances claim will reduce taxable profit, thereby reducing the level of income to be taken into account for tax credit purposes. Carefully timed capital allowances claims, taken in conjunction with the income disregard, can have an impact on the amount of tax credits that can be claimed, although the effects of this are now significantly less following the reduction in the income disregard.