1. Income and tax credits
If you are getting income support, 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 one of these benefits, the tax credit assessment is based on your 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. For example, if you are getting tax credits between 6 April 2022 and 5 April 2023, HMRC uses your income from 6 April 2021 to 5 April 2022 to work out your entitlement. Note: although your income from the previous year is used in the initial tax credit 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 more than £2,500 higher, tell HMRC and it reassesses your tax credit entitlement. If you do not tell HMRC, you will have an overpayment to repay at the end of the tax year, or an underpayment 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 (but you should let it know if the change means you are now eligible for working tax credit (WTC) or more WTC). However, any increase will be 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 tax credits 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 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 for tax credit purposes, some income is disregarded.