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LITRG takes a timely look at how tax credits entitlement might be affected over the summer holidays by changes in childcare arrangements or when children leave school.

It’s that time of year again…

The academic year is coming to an end and this article covers two key issues where your tax credits claim could be affected:

1. Childcare costs in the school holidays; and
2. What happens when your children leave school.

Make sure you read through so that you claim all you are entitled to, or avoid being paid too much and having to pay it back later. 

Childcare in the school holidays

With school holidays approaching, your childcare costs might change, for example if you need to pay for additional care while you continue working. 

How to calculate average childcare costs – usual rule

When you claim tax credits with childcare and you have variable childcare costs, you generally take your average childcare costs over the last 52 weeks – or, alternatively, estimate what your average childcare costs will be over the next 52 weeks.

However, when working out your 52-week average, you may not have taken into account that your childcare costs would go up during the summer. Maybe this is the first summer during which they have risen. If so, you work out what you think you will pay over the next 52 weeks (including rises during school holidays) and then divide that figure by 52 to find the average.

Averaging childcare costs over a shorter fixed period

Prior to April 2010, if you incurred childcare costs for a short period (for example just in the summer school holidays) you still had to average the costs out over 52 weeks. Averaging over 52 weeks means that you receive a small amount of help with your childcare costs every week so parents have to save money to pay the higher costs during the holidays.

But from April 2010, HMRC introduced a new way of calculating childcare for those with fixed period childcare costs. You can now work out your average weekly cost over the fixed period (for example the school holidays) rather than across the whole year. This means that you will receive help with your childcare costs at the time you incur the costs, rather than across the whole year. Note that this new method does not apply if you have childcare costs for most or all of the year. The following example shows how the new averaging method will work:

Melissa is a lone parent. Her parents look after her children, but spend the summer holidays visiting family overseas. Melissa uses registered childcare during the 6 week summer holidays each year. Her costs are £150 per week for 2 children.

Using the 52 week method, Melissa’s average weekly childcare costs would be £17.31 (£150 x 6 = £900/52). This amount would be included in Melissa’s tax credits each week.

Under the new fixed method, Melissa would average her childcare over 6 weeks meaning she would have her tax credits paid for 6 weeks using average weekly costs of £150 (£150 x 6 = £900/6). Once the summer holidays ended, Melissa’s tax credits would go back to normal without any childcare costs.

Telling HMRC

HMRC are allowing claimants to choose which method they would like to use. If you are unsure which one is of most benefit to you, you should get some advice from an agency like Citizens Advice or a local authority welfare rights unit. If you do decide that you want to average your costs over a fixed period, rather than 52 weeks, you should contact the tax credit helpline on 0845 300 3900 (textphone 0845 300 3909) and tell them that you would like your average to be worked out over a fixed period.

If you have variable weekly childcare costs, you need to tell HMRC if your average weekly childcare costs fall by more than £10 a week, or if you cease paying for childcare, as your tax credit award will need to be adjusted downwards to reflect the change. This includes telling HMRC if you start to get childcare vouchers from your employer.

You must tell HMRC of any such change within one month of it occurring, or your becoming aware of it. The main reason for this is to limit the amount of any overpayment, but there is also a penalty of up to £300 for late reporting.

You should also tell HMRC if your average childcare costs rise by more than £10 per week, as this will cause your tax credit entitlement to increase. You should inform HMRC within three months of the change, as it is not possible to backdate an increase in credit by more than that.

Further guidance can be found on the HMRC website. HMRC also produce a leaflet on childcare called WTC 5.

Children leaving school

As the holidays approach, some children will be coming to the end of their compulsory education and most will be waiting for exam results to decide what to do next. Others will have finished their college courses and will be thinking about heading off to university. Whatever they decide to do, it will most likely impact on your tax credits and child benefit.

Whether or not you qualify for CTC depends on the age of the child or young person and what they have decided to do.

Under 16s

You are entitled to CTC for any child under 16 who you are responsible for.

16th birthday to the following 31st August

On their 16th birthday a child becomes a ‘qualifying young person’. You can continue to claim CTC without any requirement that they be in full time education or approved training.

However, if they leave full time education or approved training and start working or if they are receiving income support, income-based jobseekers allowance or income-related employment and support allowance in their own right, you will no longer be able to claim CTC.

After the 31st August following their 16th birthday

CTC will stop automatically from the 1st September following their 16th birthday unless you tell HMRC that the child continues to meet the conditions beyond that date.

To continuing receiving CTC, the young person must be in full time non-advanced education or approved training. If they leave full time education or approved training and start working or if they are receiving income support, income-based jobseekers allowance or income-related employment and support allowance in their own right, you will no longer be able to claim CTC.

End date for CTC

Providing other conditions are met, CTC will continue until the earlier of:

• their 20th birthday, or
• the date they leave full time non-advanced education or approved training.

Where a young person decides to continue to university level education (advanced level) CTC can be paid up until the last day of the academic year before they go to university (31st August). CTC cannot be paid when they go to university or into similar advanced education.

If a young person intends to go to university and then changes their mind, CTC will be paid until 31st August or if before, to the date they changed their mind and decided not to continue in education.

Telling HMRC

It is very important that you keep HMRC up to date with changes to your CTC, otherwise you may be overpaid. You must notify HMRC within one month if:

• you cease to become responsible for a child or qualifying young person; or
• if the young person ceases to be a ‘qualifying young person’, for example by leaving education or approved training or by claiming a benefit listed above in their own right.