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What's taken into account

When the Tax Credit Office works out your tax credits, they look at:

• the tax credits elements (or payments) that you're entitled to
• your level of income

The amount you get is based on 'income limits' for the period you're claiming tax credits for.

These limits are the levels of annual income above which your tax credits payments start being reduced. These are set for a whole year.

• The income limits that are used to work out your tax credits entitlement

If you qualify for tax credits for a period of less than a year, a 'pro-rata' limit needs to be used.

This is a way of working out what proportion of the income limit your income makes up. The pro-rata limit will apply for each period you qualify for tax credits.

Example - working out an award for a short period

Let's say you are two single parents who had been claiming tax credits in their own right.

You both work 16 hours a week and each has one child under 16.

Your joint childcare cost is £2,480 a year. You make a new tax credits claim as a couple in a new household.

You're entitled to tax credits for the period from 2 May 2009 to 31 August 2009 - a total of 122 days.

The Tax Credit Office will then follow the steps below.

Step 1 - working out your income for the period

The annual Working Tax Credit income limit is £6,420. You are entitled to tax credits for 122 days out of the year.

The income limit for the 122 day period is £6,420/365 x 122.

This gives a pro-rata limit of £2,145.87.

Your joint annual income is £27,500. So your income for the 122 day period is £27,500/365 x 122.

This comes to £9,191.78. This is more than the income limit for the period. So your tax credits payments will be reduced.

But first the Tax Credit Office needs to work out what the most you could get for the period would be.

Step 2 - working out how much tax credits you're entitled to

If the period was for a whole year the most you would get would be made up of:

• Working Tax Credit basic element of £1,890
• Working Tax Credit second adult element of £1,860
• Working Tax Credit 30 hour element of £775
• Working Tax Credit childcare element (80 per cent of £2,480) of £1,984
• Child Tax Credit child element (£2,235 per child) of £4,470
• Child Tax Credit family element of £545

But each amount needs to be reduced because you’re only entitled to tax credits for 122 days.

To work this out, the Tax Credit Office divides the annual amount for each element by 365 then rounds this figure up to get the daily rate.

Then they multiply the daily rate by 122, which is the number of days that you're entitled.

When the Tax Credit Office work out the Working Tax Credit childcare element for shorter periods, they do it on a weekly basis first.

So they divide the annual amount by 52 and round this figure up to get the weekly rate.

They then multiply the weekly rate by 52 and divide it by 365.

After that, they multiply it by the number of days in the period and then again by 80 per cent. (You can only get back 80 per cent of the amount you spend on childcare.)

So the most tax credits you can get for the 122 day period is:

Element	Daily rate	What you'd be entitled to
Working Tax Credit basic element	£5.18	£631.96
Working Tax Credit second adult element	£5.10	£622.20
Working Tax Credit 30 hour element	£2.13	£259.86
Working Tax Credit childcare element (weekly rate £48, entitlement is 80% of £48 x 52/365 x 122)	-	£667.43
Child Tax Credit child element (daily rate is for one child, entitlement is for two children)	£6.13	£1,495.72
Child Tax Credit family element	£1.50	£183.00
Total		£3,860.17

Step 3 - working out your award

If your income is over the pro-rata limit, the Tax Credit Office reduces your tax credits in a certain order.

This depends on the elements that you qualify for.

What's reduced first?

The Working Tax Credit elements apart from childcare are reduced first.

So in this example, the ones you'd be entitled to are:

• basic element of £631.96
• second adult element of £622.20
• 30 hour element of £259.86

This makes a total of £1,514.02 that you'd be entitled to. This is reduced as follows:

What's taken into account	Amount (£)
Income for the period	9,191.78
Less income limit for the period	-2,145.87
Income above the income limit	7,045.91
Multiplied by 39% (the rate at which Working Tax Credit elements - apart from the childcare element - is reduced)	2,747.90

The reduced amount of £2,747.90 is higher than the £1,514.02 you'd be entitled to. So you won't get any of these tax credits.

What's reduced second?

The Working Tax Credit childcare element is reduced second.

The most you'd be entitled to is £667.43, which is reduced as follows:

What's taken into account	Amount (£)
Income for the period	9,191.78
Less income limit for the period	-2,145.87
Income above the income limit	7,045.91
Multiplied by 39% (the rate at which this element is reduced)	2,747.90
Less Working Tax Credit apart from childcare	-1,514.02
Excess amount	1,233.88

The excess amount of £1,233.88 is higher than the £667.43 you'd be entitled to, so you won't get any of these tax credits either.

What's reduced third?

The Child Tax Credit child elements are reduced third.

Because all the Working Tax Credit has been reduced to nil, the income limit of £2,145.87 is no longer used.

The income limit that's used for the Child Tax Credit child elements is the higher of:

• the £16,040 Child Tax Credit income limit - adjusted for the length of the period - in this case £16,040/365 x 122 = £5,361.32
• the amount used to reduce the previous Working Tax Credit elements to nil

The amount used to reduce the previous elements to nil is worked out as follows:

What's taken into account	Amount (£)
Working Tax Credit work elements	1,514.02
Plus Working Tax Credit childcare element	+667.43
	2,181.45
Divided by 39%	5,593.46
Plus Working Tax Credit income limit	+2,145.87
Total	7,739.34

Because it's the higher of the two figures, £7,739.34 is used as the limit.

So the child elements are reduced as follows:

What's taken into account	Amount (£)
Income for the period	9,191.78
Less income limit for the period	-7,739.34
Income above income limit	1,452.44
Multiplied by 39%	566.45
Most you're entitled to	1,495.72
Less reduced amount	-566.45
Amount due	929.27

The Child Tax Credit family element isn't reduced because your annual income is less than £50,000.

So you'll get the full amount of £183.

Step 4 - summary of your award

The elements you're entitled to	The most you're entitled to	Reduced amount you're entitled to	Net amount due
Working Tax Credit work elements	£1,514.02	£1,514.02	Nil
Working Tax Credit childcare elements	£667.43	£667.43	Nil
Child Tax Credit child elements	£1,495.72	£566.45	£929.27
Child Tax Credit family element	£183	Nil	£183
Total payment due			£1,112.27

Contact the Tax Credit Office

If you need more help you can call the Tax Credit Helpline on 0845 300 3900, or textphone 0845 300 3909 if you are deaf or have a hearing or speech impairment (open from 8.00 am to 8.00 pm every day except Christmas Day, Boxing Day and New Year's Day).

If you're calling from overseas you can also contact the Tax Credit Office on +44 289 053 8192.

More useful links

• Tax credits payments

• Tax credits and other benefits

• Changes that affect your tax credits