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LITRG have produced a quick reference table to help tax credit claimants see their potential losses from April 2016.

Background

Most tax credit claimants will have their working tax credit (WTC) and child tax credit (CTC) reduced from April 2016 after the Government announced changes to the working tax credit threshold and taper rate in the Summer Budget. Unless you are a tax credits expert, these changes may have passed you by.

Summer Budget tax credit changes

The LITRG article published on 9 July (see Useful Link below) explained the Summer Budget tax credit changes in detail. However, many existing claimants are still unaware that the changes to the WTC threshold, WTC taper rates and CTC threshold may have a significant impact on the amount they receive from April 2016.

Calculations

Tax credit calculations are complicated and they depend on a number of factors. LITRG has produced a quick reference table that shows potential maximum losses from April 2016 at different levels of income. This table is a guide only and LITRG advises anyone who may be affected and wishes to fully understand the impact of the changes on their own particular circumstances to contact HMRC or a local welfare rights organisation.

Tax credits cannot be considered in isolation from other changes such as increases in the income tax personal allowance, the new living wage set to take effect in April 2016, possible changes to passported benefits such as free school meals and other means-tested benefits such as housing benefit. Some of these other changes may lessen the impact of the tax credit cuts, although, to date, it remains uncertain whether or how entitlement to the passported benefits themselves may be affected by the changes to the tax credits system.

How to use this table

The following table shows the maximum loss of tax credits, at various levels of income, from the changes set to take effect in April 2016.

1. You should look at the column that fits your circumstances – if you are entitled to WTC only, then use the figures in column 1; if you are entitled to CTC only, then use the figures in column 3. If you are entitled to both WTC and CTC, even if you do not receive any WTC because of your income level, then you should use column 2.
2. Find in the left-hand column the level of your income (or joint income if you are claiming jointly with a partner). The income figure is the one used to calculate your tax credits award for 2015/16, and LITRG has assumed your income for tax credit purposes will not change for 2016/17.
3. The table shows your maximum annual loss based on the level of income. If your annual award is more than that amount, it is likely to be reduced by that amount. If it is less than that amount, it is likely to be reduced to nil. See the examples below the table.

Example 1

Ben is married with one child. He works full-time, and he and his wife have a joint income of £20,000. They expect to have the same income and circumstances in 2016/17. Their tax credits award for 2015/16 is £2,537.

As Ben and his wife are entitled to both WTC and CTC, they need to use column (2) in the table. At an income of £20,000 the maximum loss will be £2,184. As Ben currently receives more than this, he can deduct the potential loss from his current award and estimate that his 2016/17 tax credits will be £353.

Example 2

Rachel is a single parent with one child. She works more than 30 hours a week and has an income of £28,000. She pays qualifying childcare costs of £100 a week for 48 weeks. Her tax credits award for 2015/16 is £2,617.

As Rachel is entitled to both WTC and CTC, she needs to use column (2) in the table. At an income of £28,000 the maximum loss will be £2,744. As this is more than her existing tax credits award, it is likely that Rachel will receive no tax credits in 2016/17.

Example 3

Fiona is a single parent with one child, and she is in paid employment but does not work enough hours to qualify for working tax credit. Her income is £4,000. Her tax credits award for 2015/16 is £3,325.

As Fiona is entitled to CTC only, she needs to use column (3). At an income of £4,000 Fiona’s tax credits will not be affected by the changes announced. This is because her income is less than the CTC threshold in both 2015/16 and 2016/17.

Example 4

Jonathan is a single parent with one child. He is not in paid employment but has a rental property which produces an income, for tax credits purposes, of £14,000 a year. His tax credits award for 2015/16 is £3,325.

As Jonathan is entitled to CTC only, he needs to use column (3). At an income of £14,000 the maximum loss will be £900. This is less than his 2015/16 award, so his 2016/17 award will be £3,325 less £900 = £2,425.

Important information about the table

If you are using the table, please bear in mind the following points.

• It is intended to be a helpful, rough guide indicating maximum possible losses – all claimants should check their own position with HMRC or a welfare rights specialist.
• The table assumes no change in income for tax credit purposes or circumstances between the two tax years.
• Those claiming the disability elements (WTC or CTC) will see a small increase in those elements, which should reduce the maximum loss slightly.
• All calculations are based on annual tax credits figures.
• The loss of tax credits should not be looked at alone. The impact of the tax credits changes illustrated here may be affected by increases in the income tax personal allowance, the new living wage set to take effect in April 2016, changes to passported benefits such as free school meals and other means-tested benefits such as housing benefit. Some of these changes to other entitlements may offset the loss of tax credits. For example, a reduction in WTC may mean an increase in housing benefit for some claimants. It is not known what changes, if any, will be made to passported benefits as a result of the changes to the tax credits system.
• If you are paying back a tax credit overpayment from previous years, you may already be receiving less in tax credits than you are entitled to in order to pay the overpayment back. From April 2016, families with income of £20,000 or more may have their awards reduced by 50% (currently 25%) to repay previous overpayments. This is based on individual circumstances and cannot be shown in the table.

Useful link

LITRG article published on 9 July 2015