1. Working out your income
While you are on income support (IS), income-based jobseeker’s allowance, income-related employment and support allowance or pension credit, you are entitled to maximum tax credits without any income test. If you are not on these benefits, the tax credit assessment is based on income over a full tax year, 6 April to 5 April. To assess your award, HM Revenue and Customs (HMRC) uses your income from the previous complete tax year. If you are getting tax credits between 6 April 2022 and 5 April 2023, it uses income from 6 April 2021 to 5 April 2022. Note: although your income from a previous year is used in the initial assessment, all other relevant circumstances, such as the age of your child, are taken from the current year of the tax credit award.
Your tax credits are first assessed using the previous year’s income, even if HMRC knows at the outset that your circumstances have changed. If you expect your income over the current tax year to be more than £2,500 lower or higher, tell HMRC and it reassesses your entitlement. If you do not tell HMRC, you will have an overpayment to pay back at the end of the tax year, or an underpayment of tax credits that you will get back as a lump sum. At the end of the tax year, HMRC sends you an annual review form to check whether your income and circumstances have stayed the same over the year. It reassesses your award for the previous year based on the current year’s income plus £2,500 if it is more than £2,500 lower than in the previous year, or based on the current year’s income less a disregard of £2,500 if it is more than £2,500 higher.
If your income increases by £2,500 or less since the previous tax year used to assess your claim, you do not need to tell HMRC as this does not affect the amount to which you are entitled. However, you should let HMRC know if the change means you are now eligible for working tax credit (WTC) or more WTC. Any increase is taken into account from the following April (April 2023 for an increase in the 2022/23 tax year), so it is important to tell HMRC of any increase by this date, otherwise you are likely to incur an overpayment.
If you have a partner, your claim is made jointly and her/his income counts as well as yours.
Unless you or your partner are working and eligible for WTC, your maximum child tax credit (CTC) is reduced if your income is above the threshold of £17,005 a year. If you are eligible for WTC, this threshold is £6,770. When working out your income, some income is disregarded.
Examples
Antonio is a mature student. He has one child, Eva, aged nine. In the tax year April 2020 to April 2021, he was working and earning £22,000. He starts university in September 2021 and now his only income, apart from child benefit, is his student grants and loan. He only gets a small amount of CTC, based on his earnings in the tax year 2020/21. Antonio phones the Tax Credit Helpline and gives details of his student support. HMRC reassesses his CTC based on this year’s income plus £2,500 and awards him maximum CTC (one family element and one child element).
Kirsty was getting IS before she became a student. She now gets a student loan of £6,750, an independent students’ bursary of £1,000, a lone parents’ grant of £1,305, a childcare grant of £1,215, child support maintenance of £520 and child benefit. Her CTC is reassessed and she is awarded maximum CTC based on the IS she was getting in the tax year 2020/21. Although her income in 2021/22 has increased since 2020/21, only the lone parents’ grant counts for tax credit purposes. Kirsty is still entitled to maximum CTC.