Child Tax Credits and Working Tax Credits explained

Tax credits, or low income subsidies, provide additional income to individuals through credits. The credit amount is based on the family's income or status. There are two types of tax credit: Child Tax Credits and Working Tax Credits. This sort of benefit is means tested, so is not available to all.

Child Tax Credits

Families with children under the age of 16, or with children aged 16 to 19 who are engaged in certain types of education or training, are eligible for Child Tax Credits. The parents have to be working for 16 hours a week or more unless one or both are registered disabled, in hospital or in prison and the combined household income cannot exceed £41,000.

The tax credits can pay up to 70 per cent of childcare costs, but these costs are capped. If the credit is for one child the limit is £122 a week. If it's for two or more, you can claim up to £210. As this benefit is means tested, you may not get the full amount. As with all tax credits, the lower the income, the more tax you will receive.

Working Tax Credits

If you have children you only need to work 16 hours to qualify as your childcare responsibilities are taken into account. People without children have to be over 25 years old and working for 30 hours or more per week in order to qualify for working tax credits.

If you are registered disabled and are over 16 you need only work 16 hours a week to qualify and it's the same for those over 60 years old.

How it works

Despite the name, this form of social benefit is not a reduction in the tax a recipient pays. It is paid to the recipient as a monthly supplement to their wage.

To begin with each individual has to make an application to HM Revenue and Customs (HMRC). From the application form, HMRC calculates a tax credit amount which is based on the previous tax year's income and the claimant’s current circumstances. The payment is then made weekly or monthly directly to the claimant’s bank account.

At the end of the tax year, HMRC sends forms to claimants asking them to confirm their annual salary. From this HMRC calculates whether they need to pay the claimant a balancing amount or if the claimant will have to pay a rebate.

Final word

Tax Credits are designed to help the lowest earners achieve a good standard of living for themselves and their families, so the amount an individual can claim will alter as their employment circumstances change or their child grows up. The qualifying requirements for Tax Credits also change with the annual Government Budget, so the figures presented above act only as a guideline.

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