Tax Credits

1. Tax Credits Law Centre NI November 2009

2. Tax Credits "Tax credits provide support to 20 million people including 6 million families and 10 million children. They have helped to lift 600,000 children out of relative poverty since 1997." • Stephen Timms, chief secretary to the Treasury.

3. Tax Credits "People find themselves struggling to repay large overpayments without receiving proper explanations of how they have arisen, and without being given notice before recovery starts, so they have no time to budget or even challenge the overpayment," • Katie Lane, Citizens Advice policy officer

4. Tax Credits • Child Tax Credit (CTC) • means tested credit • families with children • Working Tax Credit (WTC) • means tested credit • families with children • single people/couples – no children • disabled people • HM Revenue and Customs • Award period

5. Income Test • does not apply if in receipt of IS/JSA(IB) or PC as entitled to maximum TC; • calculated firstly on tax year; and • then relevant period • no of days when TC elements remain the same (all but one) • childcare remains same • average weekly childcare charge does not cease or change by £10 or more

6. Relevant Period Calculated on a pro rata basis • annual income x no of days no of days in year in relevant period • round down to nearest penny

7. Which Tax Year • previous tax year • current year income used in some cases • no entitlement • current year’s income exceeds previous year by more than £25,000; disregard £25,000 • previous years income exceeds current years income

8. Which Tax Year "As working tax credit is aimed at the lowest paid workers these claimants will typically relate to hourly rates of pay or weekly wages. Annual taxable income and financial years mean nothing to them"

9. What counts as income Usually taxable income and includes: • earnings • taxable profits from self-employment • taxable social security benefits • certainpensions • Income from • capital • Property • foreign income • notional income • miscellaneous income

10. Calculating Income • Step 1 Calculate and add together • pension income • investment income • property income • foreign income • notional income

11. Calculating Income cont… • Step 2 Calculate and add together • earnings • social security income • student income • misc income • trading income • Step 3 Calculate total income and disregards

12. Disregarded Income Totally disregard: • expenses in relation to charitable/voluntary work • expenses in relation to training undertaken at an employment rehabilitation centre • payment under New Deal 50 plus • payment made under the Disabled Persons Employment Act (NI) or Employment and Training Act 1950 • top ups relating to an employment programme • discretionary training payment • educational maintenance allowance • foster care payments under the Finance Act 2003

13. Disregarded Income cont… • boarding out and fostering fees • adoption payments that are exempt under the Taxes Act • travel expenses under the NHS scheme • expenses paid to visit someone in custody • payments under Community Care direct payment scheme • vouchers paid to former asylum seekers or her/his dependants • provident payments by a trade union • payments for computer equipment that is exempt from income tax under the Taxes Act

14. Example 1 Jane, who is 29, is a lone parent with one child aged 4. She works 25 hours a week. Her current year income is £7,800 which is the same as last year. She pays £135 per week to a registered childminder who looks after her child. Her circumstances are unlikely to change in the current year. She is claiming from the start of the tax year. Calculate income • current year income is: £7,800.00 • previous year income is: £7,800.00 • relevant income is: £7,800.00 (previous year income)

15. Example 2 Jane claims on 1 December 2009 instead. • Relevant period: less than 1 year • Relevant income • No of days remaining in tax year:126 7800 x 126 = £2692.60 365

16. WTC - Who can claim • Families • Couples without children • Single people, 25 and over • Disabled aged over 16 • Age limits • Joint claim must be made by couple

17. Conditions of Entitlement • in paid work of 16 hours or more a week, and • have a child/qualifying young person, or • have a disability and be at a disadvantage of getting a job, or • be entitled to 50+ element or • in paid work of 30 hours a week or more and aged 25 or over • in the United Kingdom • not subject to immigration control

18. Disability and disadvantage of getting a job One of the disabilities listed in the schedule, and • working 16 hours or more per week • receiving DLA, AA, certain war pensions, Industrial Injuries Benefit with constant attendance allowance, an invalid carriage, or • in 26 weeks before claim for at least one day: • received Incapacity Benefit (short term higher/long term), SDA; IS/HB, JSA (IB) which includes a disability higher pensioner premium, • Employment & Support Allowance where entitlement to that allowance or statutory sick pay has existed for a period of 28 weeks;

19. Disability and disadvantage of getting a job cont… or has started training for work within 8 weeks of receiving: Incapacity Benefit (short higher/long term), or Severe Disablement Allowance, or Contributory Employment & Support Allowance where entitlement to that allowance or statutory sick pay has existed for a period of 28 weeks

20. Disability and disadvantage of getting a job cont… • has recently become incapable of work, and • has a disability likely to last 6 months or more • current gross weekly earnings have dropped by at least the greater of 20% and at least £15 a week • has been receiving for 20 weeks Statutory or Occupational Sick Pay, Incapacity Benefit (short term lower), Employment & Support Allowance, Income Support or national insurance credits on the grounds of incapacity for work/limited capacity for work.

21. 50 Plus Element • is aged at least 50; and • starts remunerative work of at least 16 hours per week; and

22. 50 Plus Element (cont.) • for at least six months before starting work: • was in receipt of Income Support, JSA, Incapacity Benefit, Employment & Support Allowance, SDA, or both retirement pension and PC; or • had a dependent’s increase for her/him included in another person’s claim for one of the above; or • was in receipt of national insurance credits; or • was in receipt of one or a combination of the above (NB Carer’s Allowance, Bereavement or Widowed Parent’s Allowance)

23. 50 Plus Element (cont.) • Joint claim, if each satisfy the required conditions, two awards will be paid; • 12 month limit.

24. CTC - Who can claim Person(s) claiming must be: • over sixteen; and • responsible for a child or young person • not subject to immigration control • ordinarily resident and have a legal right to reside in the UK

25. Elements Of WTC • Adult £1,890 • Second Adult £1,860 • Lone parent £1,860 • 30 hour £ 775 • Disability £2,530 • Severe disability £ 1,075 • 50 plus £1,300 (16hrs) £1,935 (30hrs) • Childcare 80% of charges up to £175 or £300

26. Disabled Worker Element • treated as having a disability which puts her/him at a disadvantage of getting a job • both members of a couple satisfy this condition, two elements will be paid

27. Disabled Worker Element (cont.) • treated as receiving a qualifying benefit when claim for WTC is made or treated as made within 8 weeks of a previous award which included the disability element as: • 26 weeks before the date of claim, receipt of Incapacity Benefit (short-term higher and long term), Employment & Support Allowance, SDA or IS/JSA(IB)/HB where the applicable amount included a higher pensioner or disability premium; or • the conditions relating to having been incapable of work are met

28. Severe Disability Element • person claiming, or, in the case of a joint claim, one of the people claiming receives: • DLA high rate care; or • Attendance allowance high rate; or • Would receive these benefits but for being in hospital • where both members of a joint claim couple each satisfy any of these conditions, then two awards are payable

29. Childcare Element A childcare element is payable: • 80% of eligible childcare costs up to a maximum • £175 weekly for one child • £300 weekly for two or more children • qualifying conditions must be met

30. Childcare Element cont… Person must be a: • lone parent working sixteen hours or more per week; or • member of a couple where both partners work sixteen hours or more per week; or • member of a couple where the person claiming works sixteen hours or more per week and the partner is incapacitated, in hospital or prison. In addition the child or children cared for must be: • of qualifying age; and • in eligible childcare

31. Change of circumstances Recalculated when childcare costs: • increase or decrease by £10 a week or more • childcare costs cease When childcare costs cease or decrease by at least £10 for 4 consecutive weeks, the person claiming is required to notify HMRC within one month

32. Calculate childcare element • weekly childcare charge: £150.00 • round up £ £150.00 • no of days in relevant period: 95 • actual childcare costs £150 x 52 = £7800 • Pro rata 7800 x 95 = 365 £2030.14 • childcare element 80% of £2030.14 = £1624.12

33. Elements of CTC • Family £545 • Family baby addition £545 • Child £2,235 • Disability £2,670 • Severe Disability £1,075

34. Family Element • family element • responsibility for child/young person • income less than £50,000 • one per family and claim • family element baby addition • child under 1 year • one per family

35. Disability Element • disability element • child on DLA or registered blind • severe disability element • child on DLA high care

36. Calculating Tax Credits • Step 1: work out relevant period • Step 2: calculate maximum TC • Step 3: calculate childcare element • Step 4: calculate income • Step 5: calculate the threshold amount • Step 6: compare income with threshold • Step 7: apply reductions • Step 8: calculate entitlements to TC

37. Tax Credits – Day 2

38. STEP 1Relevant Period Relevant period is the number of days in which: • tax credit elements remain same • childcare remain same • childcare cost do not cease or change by more than £10 Claim calculated on a pro rata basis by taking the relevant elements (except childcare), income and threshold, dividing by the number of days in the tax year, and multiplying by the number of days in the relevant period.

39. STEP 2Maximum TC Calculate the maximum TC for the year or for the relevant period by totalling: • the relevant elements of WTC (maximum WTC) excluding the child care element; and • the relevant CTC elements (maximum CTC) excluding the family element.

40. STEP 3Childcare Element • 80% of eligible childcare costs up to weekly maximum • £175 for one child • £300 for two or more children • qualifying conditions must be met

41. STEP 4: Income • Calculate and add together • pension income • investment income • property income • foreign income • notional income • Calculate and add together • earnings • social security income • student income • miscellaneous income • trading income • Calculate total income and disregards

42. STEP 5Threshold Amounts • £6,420 if a person is entitled to WTC; and • £16,040 if a person is entitled to CTC only

43. STEP 6Compare income with threshold amount • If income is the same as or less than the threshold amount then maximum TC, including the childcare element and the family element • If income exceeds the threshold amount then calculate 39% of the excess. This is know as the reduction figure

44. STEP 7Apply Reductions • reducing the maximum WTC by the reduction figure (excluding maximum CTC, child care element or family elements) • if the reduction figure is more than maximum WTC then reduce the childcare element by the income that is remaining • if the reduction figure is more than the maximum WTC and the childcare element then reduce maximum CTC by the income that is remaining • Family element only reduced where income is more than £50,000

45. STEP 8Entitlement to TC • If the reduction figure is less than the maximum WTC then entitlement to TC will be: • the amount remaining after reduction of WTC: plus • any child care element: plus • maximum CTC: plus • the family element

46. Entitlement to TC cont… • If the reduction figure is less than maximum WTC and childcare element then entitlement to TC will be: • the amount remaining after reduction of maximum WTC and child care element: plus • maximum CTC: plus • the family element

47. Entitlement to TC cont… • If the reduction figure is less than maximum WTC, the childcare element and maximum CTC, then entitlement to TC will be: • the amount remaining after reduction of maximum CTC: plus • the family element

48. Example 1 Jane, who is 29, is a lone parent with one child aged 4. She works 25 hours a week. Her current year income is £7,800 which is the same as last year. She pays £135 per week to a registered childminder who looks after her child. Her circumstances are unlikely to change in the current year. Step 1: work out relevant period 365 days

49. Step 2: calculate maximum TC Max WTC basic element £1,890 lone parent element £1,860 £3,750 Max CTC Child element £2,235 Family element is: £ 545

50. STEP 3: Calculate The childcare element weekly childcare cost: £135.00 round up £ £135.00 relevant period 365 days actual childcare costs 135 x 52 = £7020 childcare tax credit: 80% of £7020 = £5616