How do I calculate tax credits?

Updated on 27 June 2018

Here we detail everything you need to know to calculate your tax credits.

The Government is gradually introducing universal credit, a new benefit which will eventually replace tax credits, and some social security benefits. Universal credit is being introduced geographically and in areas where the full service is available, HMRC will not accept brand new claims for tax credits except where the claimant (or their partner) has reached state pension credit age. Existing tax credit claimants are expected to moved across to universal credit between 2019 and 2023. You can find out more about this in our universal credit section.

 

If you meet the qualifying conditions for child tax credit (CTC) or working tax credit (WTC) or both, the amount you get will depend on:

  • which elements of CTC and/or WTC you and your family qualify for;
  • how much income you (and any partner) have (either for the current year or previous year); and
  • whether you are paying back an overpayment

What is the maximum amount?

Tax credit awards are made up of a number of elements – check our CTC and WTC pages to see which ones apply to you. In summary the elements available are:

  • WTC basic element
  • WTC couple/second adult element
  • WTC 30 hour element
  • WTC childcare element
  • WTC disability element
  • WTC severe disability element
  • CTC child element (For children born on or after 6 April 2017, this may be limited to 2 children unless an exception applies)
  • CTC child disability element
    • disabled child rate
    • severely disabled child rate
  • CTC family element (* from 6 April 2017, this is only payable for claims which include a child/children born before 6 April 2017)

HM Revenue & Customs (HMRC) add together the elements which you qualify for based on circumstances to work out what is called your maximum tax credit award – the most you can get.

The amount and type of income you (and any partner) have for the current tax year and previous tax year may reduce the maximum award and the amount you are paid. The amount of award that is paid to you might also be less than the maximum if you are paying back an overpayment.

While you are on income support, income based jobseeker’s allowance, income-related employment and support allowance, or pension credit, you should be paid the maximum amount. This does not apply if you are receiving any of these benefits during the four weeks after you stop work or reduce your hours so that your WTC stops. It should only be less than this if you are paying back an overpayment.

How is my award worked out?

From your maximum award, HMRC take away a ‘reduction due to income’. You can find out what counts as income for tax credits purposes on our income page.

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Working tax credit only claims

If you are only entitled to WTC because you are not responsible for a child or qualifying young person, then there will be a reduction due to income if your income is above the £6,420 threshold.

This means, if your income is less than £6,420, you will receive the maximum amount of tax credits. If your income is above this amount, your maximum tax credits award is reduced by 41p for every £1 of income above the £6,420 threshold.

Example

John works 20 hours and claims working tax credit as a single person. He is self-employed and qualifies for the disability element. His income for tax credit purposes is £5,350.

John’s maximum tax credits are worked out first:

WTC basic element £1,960
WTC disability element £3,090
Total maximum £5,050


As his income is under the £6,420 threshold there will be no ‘reduction due to income’ and so John will receive the full £5,050 of WTC.

Example

Chrissie works 35 hours and claims working tax credit as a single person. She also qualifies for the disability element. Her income for tax credit purposes is £14,500.

Chrissie’s maximum tax credits are worked out first:

WTC basic element £1,960
WTC 30 hour element £810
WTC disability element £3,090
Total maximum £5,860


However, unlike John in the previous example, Chrissie’s income is above the £6,420 threshold which means that HMRC will reduce her maximum tax credits award. The reduction in income is calculated as follows:

Income £14,500
Less threshold £6,420
Excess income £8,080
X 41% £3,312.80


Chrissie’s maximum award of £5,860 will be reduced by £3,312.80 because her income is above the threshold. She will receive tax credits of £2,547.20.

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Child tax credit only claims

If you are only entitled to claim CTC because you or your partner are not working enough hours to qualify for WTC or you do not qualify for WTC for some other reason, then there will be a reduction due to income if your income is above £16,105. If you have WTC elements included in your award, but do not receive any WTC because your income is too high, you should look at the next section.

Above the £16,105 threshold, the maximum tax credits award will be reduced by 41p for every £1 of income.

Example

Devin and Mike claim tax credits as a couple. They have three children all born before 6 April 2017. Mike works 20 hours a week. They do not qualify for WTC because Mike is not working enough hours. Their income from Mike’s work, an occupational pension and some rental property they own is £22,000.

Their maximum tax credits award will be worked out first:

Child element standard rate x 3 £8,340
Family element £545
Maximum tax credits £8,885


However, because their income is above the £16,105 threshold for CTC only claims, HMRC will apply a reduction due to income which is worked out as follows:

Income £22,000
Less threshold £16,105
Excess income £5,895
X 41% £2,416.95


Devin and Mike’s maximum tax credits of £8,885 will be reduced by £2,416.95 to take account of their income. They will receive £6,468.05 of CTC.

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Working tax credit and child tax credit claims

If you are entitled to both WTC and CTC, even if your income is too high to receive any WTC, then the £6,420 threshold will be used in working out any reduction due to income.

What income is used to calculate my claim?

HMRC will use either previous year income or current income (actual income or an estimate if the year has not yet finished) to calculate your claim and work out your reduction due to income (explained above). See our ‘what income will be used to calculate my claim?' page to find out which income will be used for your claim.

Why does my tax credits award notice show daily figures?

The rules around calculating tax credits awards are complicated. In our examples above, we have used the annual figures for each of the elements. This is common when showing examples. However, the HMRC computer system actually uses daily rates to calculate awards which means there may be a slight difference when compared to the annual figures.

You can find a detailed step by step guide to calculating awards using daily rates on our Revenuebenefits website for advisers.

You can also download the daily and annual rates for tax credits from 2003-2004 to date.

What if my claim is stopped because I claim universal credit?

If you have been claiming tax credits and claim universal credit during the same tax year, then HMRC will stop your tax credit award with effect from the day before your universal credit entitlement starts. The way your tax credit award for the year is calculated is based on the same principles explained on this page but the income figures used may be calculated in a different way. See our universal credit and stopping tax credits section for more information.

More information

This section of the site gives a brief overview of how tax credits awards are calculated. For more detailed information, including information about how claims were calculated in previous years, visit the following pages on our website for advisers:

Calculating tax credits

Understanding the disregards

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