A simple guide to Child tax credits

There are two main tax credits:

1.    Working tax credit, available to working people on low incomes

2.    and child tax credit, which is for people with children, whether they areworking or not

Child tax credits are available to people on surprisingly high incomes, the basic element being available until family income exceeds £40,000.

Claims can only be backdated for three months, so it is important to take prompt action to ensure credits due are not lost. It is possible to make a protective claim where a person is not eligible because their income is too high, but would otherwise meet the criteria. This gives them an identity for tax credit purposes and means if their income falls, they may be entitled to tax credits recalculated to the start of the tax year, whereas if they do not claim until income does fall the claim can only be backdated for three months.

From 6 April 2012 however the backdating provision has been shortened to one month.

Tax credit applications have to be joint applications if the claimant is part of a couple.

The renewal deadline for claims is 31 July. At the start of the tax year, tax credits are paid on a provisional basis, based on the previous year’s income and will be finalised and recalculated at the year end. If income has increased tax credits will only be recalculated if the increase is more than £11,000. This will reduce to £5k from 6 April 2012. A disregard for income falls will also be introduced from 6 April 2012

To calculate entitlement to tax credits it is necessary to look at the claimant’s income. Self-employed income for this purpose will be the taxable profit for the tax year. If a loss ids made it will be set against any other income for that year including that of any joint claimant.

Losses carried back against the previous year’s income for income tax purposes will be treated differently for tax credit purposes. For tax credits, any loss will be set against other income in the same year and any not to utilised can be carried forward.

A capital allowance claim will reduce taxable profit, thereby reducing the level of income to be taken into account for tax credit purposes. Carefully timed capital allowance claims, taken in conjunction with the £11,000 disregards can have a big impact on the amount of tax credits that can be claimed.

This can be a complicated area, so if you have any questions, speak to an accountant.

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