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How your tax credits entitlement is worked out

Your tax credit payments are based on your current personal circumstances and your annual income from the tax year that ended on 5 April 2009. The lower your income, the more tax credits you can get.

What's taken into account

When the Tax Credit Office works out your tax credits, they look at:

  • the tax credits elements (or payments) that you're entitled to
  • your level of income

The amount of tax credits you get is based on the 'income limits' for the period you're claiming tax credits for. These limits are the levels of annual income above which your tax credits payments start being reduced.

The lower your income is, the more tax credits you're likely to get.

What are the different tax credits elements?

Child Tax Credit elements

Maximum amount for 2009-10

Family element - the basic element for families responsible for one or more children

 £545

Family element paid to families with one or more children under the age of one. Only one payment regardless of how many children under one

 £545

Child element - one for each child or young person you are responsible for

 £2,235

Disability element - one for each child you are responsible for if you are receiving Disability Living Allowance for the child, or the child is registered blind or has been taken off the blind register in the 28 weeks before the date of claim

 £2,670

Severe disability element - one for each child you are responsible for if you receive the Highest Rate Care Component of Disability Living Allowance for the child 

 £1,075

 

Working Tax Credit elements

Maximum amount for 2009-10

Basic element - paid to any working person who is eligible

 £1,890

Couples and Lone Parent element

 £1,860

30 hour element - for people who work at least 30 hours a week. Couples with at least one child can claim the 30 hour element if they work at least 30 hours a week between them providing at least one of them works 16 hours or more a week

 £775

Disability element - for working people who are disabled

 £2,530

Severe disability element – for each person who receives the Highest Rate Care Component of Disability Living Allowance or the Higher Rate of Attendance Allowance 

 £1,075

50+ Return to work payment (16-29 hours) for people who are returning to work after a period on benefits

 £1,300

50+ Return to work payment (30+ hours) for people who are returning to work after a period on benefits

 £1,935

A childcare element, where you can get back up to 80 per cent of your costs for eligible childcare

£175 maximum eligible cost per week if you're paying for one child, £300 maximum eligible cost per week if you're paying for two or more children

What are the income limits?

You only qualify for Child Tax Credit

If you only qualify for Child Tax Credit the income limit is £16,040. If your income is more than this, the child element will be reduced. But your income can be up to £50,000 before the family element is reduced.

You only qualify for Working Tax Credit

If you only qualify for Working Tax Credit the income limit is £6,420. If your income is more than this, the amount you get will be reduced.

You qualify for both Child Tax Credit and Working Tax Credit

If you qualify for both tax credits, the income limit for Working Tax Credit stays at £6,420.

But the Child Tax Credit income limit becomes the higher of:

  • the £16,040 limit
  • the amount used to reduce the Working Tax Credit elements to nil - this is explained in the guide on how to work out your tax credits entitlement for short periods

However your income can be up to £50,000 before the family element of Child Tax Credit is reduced.

Period the income limits relate to

If you're entitled to tax credits for a whole year, the annual income limits are used to work out your award.

But the limits can also be used on a 'pro-rata' basis if you're entitled to:

  • tax credits for periods shorter than a year
  • different tax credits elements over different periods

'Pro-rata' is a way of working out what proportion of the income limit your income makes up.

The same rule applies for shorter periods as it does for full years. So, for the period, if your income is no more than the income limit you'll get the full amount of the tax credits. But if your income is above the limit, your payments will be reduced.

How your tax credits are reduced

If your income is higher than the income limit, your tax credits award is reduced.

Your award may be made up of several entitlements. Each entitlement is reduced in a set order as follows:

  1. Working Tax Credit apart from the childcare element at the rate of 39 per cent
  2. Working Tax Credit childcare element at the rate of 39 per cent
  3. Child Tax Credit child element at the rate of 39 per cent
  4. Child Tax Credit family element at the rate of 6.67 per cent

The Tax Credit Office works out a reduced amount by taking away the income limit for the particular element from your income. The result is multiplied by the rate that applies to that element - 39 per cent or 6.67 per cent - to give the reduced amount.

If the reduced amount is equal to or higher than the amount of the tax credits element - or payment - you qualify for, you won't get any tax credits for that element.

But if your entitlement is higher than the reduced amount, the amount you'll get is the difference between the entitlement and the reduced amount.

Example - total income of £10,000

Let's say your annual income is £10,000.

You're entitled to the Working Tax Credit basic element (£1,890) and 30 hour element (£775), giving a total of £2,665. The Working Tax Credit income limit is £6,420. Both elements are reduced together, so the reduced amount is £10,000 - £6,420 x 39 per cent = £1,396.20.

The reduced amount is less than your entitlement, so the amount you'll get is £2,665 - £1,396.20 = £1,268.80.

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