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This page is a brief summary of Child Tax Credit (CTC) and Working Tax Credit (WTC) which has been payable from 6 April 2003.

Claims can only be backdated for 3 months, but are based income for a complete tax year.  Even if you do not expect to be eligible for the year to 5 April 2006, you should consider submitting a provisional claim - what if the unexpected happens - you are made redundant, or become ill, or your business incurs a loss?  The Revenue has confirmed that they welcome claims from any taxpayer who wishes to preserve their possible entitlement to tax credits.

A household with a baby and total income of £66,300 a year may benefit, a family with a child but no birth in the tax year may benefit on total income up to £58,150.  Almost six million households and 90% of families are eligible for the family element of CTC.  Single people and couples without children on incomes up to approximately £14,820 can benefit.

Up to 70% of childcare costs may be reimbursed until 6 April 2006 then the proposed limit will be 80%.  Childcare costs can include a childminder at home provided they are approved by the local authority and have a registration number.

Guide to possible benefits (2005/06 and subject to a number of assumptions) -

The award cycle -

Claims can only be backdated by 3 months so claims effective from 6 April 2005 should be submitted by 5 July 2005.

The definition of income is broadly that for income tax but with a multitude of variations.

The period of an award will generally be the tax year from 6 April to the following 5 April, based upon the actual income for that year, although using the previous years income as a guide.

If the claimants' income falls during the year, they can apply straight away to have the award increased.

If the claimants' income rises, an overpayment of credit will only result if the increase is more than £2,500 per annum, and will only arise on the excess over than figure.  Recovery of any such overpayment will normally be spread over the next year's award, or coded out through the tax code, and a request for a lump sum is expected to be rare.

Above the first income threshold, the maximum award is reduced by 37p for every extra £1 of income.  If recovery is made in the subsequent year, overpayments could potentially be quite large and recovery, together with a reduced award because of extra income, may still cause financial embarrassment.  An in year overpayment will be adjusted immediately, but a previous year overpayment can be spread over 12 months, longer in cases of hardship.

While it is not obligatory to notify the Revenue of any change of income during the year, it will probably be sensible to do so.

Changes involving the adults in a household or reductions of £10 per week in childcare costs have to be notified within three months. 

An award will be based on the joint income of a couple, married or not, in the case of same sex couples from 5 December 2005, in civil partnerships or not.  The concept of privacy in respect of income, introduced in 1991 with separate taxation of husbands and wives, has to be forgone in making a claim for TC.

Tax Credits are calculated in several stages -

The WTC can be claimed by people in work including self employment, regardless of whether they have children, and including single people provided they are over 25 years of age and work at least 16 hours a week.

The 2005/06 weekly figures for the various elements of WTC are -

The CTC can be available to all married or unmarried couples or lone parents over the age of 16, provided they are responsible for one or more child, regardless of whether they are in work, under the following rules -

• a person is treated as responsible for a child who normally lives with him or her
• competing claims will be dealt with on the basis of who has 'main responsibility'
• the main responsibility test can be decided by the parties making the election, or the Revenue making a determination
• there are circumstances in which a child is not treated as being the responsibility of any person - 
  • where the child is in the care of the local authority
  • where the child is in prison
  • where the child is claiming for his or her own child

The 2005/06 weekly figures for the various elements of CTC are -

There are two income thresholds.  The 'first income threshold' (FIT) is gross income of £100.10 per week (£5,220 p.a.).  At or below this the claimant is entitled to the 'maximum award' for their circumstances.  If income is higher, their 'maximum award' is reduced by 37p for every £1 above the FIT.  For those only in receipt of CTC the FIT will be £266.76 per week (£13,910 p.a.).  There is a 'second income threshold' (SIT) at gross income of £958.90 per week (£50,000 p.a.) above which level the family element of CTC is withdrawn at 1 in 15.  The SIT indicates that tax credits are not just for the low paid.

Example calculation 2005/06 -

Alan works full time and earns £16,000 gross per year.  Louise works part time earning £10,000 gross per year.  They have two children, one of whom has a disability.  They pay £325 per week for childcare.

Because the reduction from the maximum award ** £149.11 exceeds the WTC excluding childcare * £69.90, no amount will be payable through the employer.

Payment -

WTC excluding childcare for employees has been paid through the employer but this is being phased out in 2005/06 and will be paid directly.  WTC excluding childcare for the self employed, and all other benefits will be paid directly by the revenue to the main carer.

The employers role -

Employers pay the WTC (excluding the childcare element which is paid direct to the main carer) in much the same way as they previously paid WFTC and DPTC.  They continue to be able to obtain funding, but will have less changes because WTC will normally be assessed for 12 months, and is the first of the Tax Credits to be withdrawn on an increase of income.

Timing of pay increases will still be relevant to the employees cashflow, and, unless the £2,500 increase is exceeded, to the employees total benefit.

Note that Child Benefit also continues to be paid to the main carer at the rate of £17.00 per week for the first child and £11.40 for each subsequent child - full details at http://www.inlandrevenue.gov.uk/childbenefit/index.htm.

Background -

Do not be confused by Working Families Tax Credit (WFTC), Disabled Persons Tax Credit (DPTC) and Children's Tax Credit (CTC) which ceased at 5 April 2003.

Note the initials CTC common to the old and new schemes - the old CTC is only an allowance against tax, but the new CTC is a benefit also available to non tax payers.

The adult, child-related and work-related elements of WFTC and DPTC reappear in the new WTC and CTC which also replace child premiums in jobseekers allowance and some aspects of the 50-plus return to work payments.

Detailed information is available from http://www.inlandrevenue.gov.uk/pdfs/wtc2.htm.

Reminder - disclaimer applies. Please feedback your comments.  This page was last modified 29 August 2005.