Tax credits and working part of the year

Aureus

Hi,

I wonder if anyone can help me with a query.

As I understand it there's a certain income threshold for the Working Tax Credit (WTC), above which you're not entitled to anything. What I'd like to know is how does it work out if you only work part of the year.

Say half-way through the year you start a job with a salary of £15,000. You have been unemployed for the first six months so your total earnings in that tax year will actually only be £7,500. For the purpose of the WTC is your income considered to be £15,000 or £7,500?

I gather that, for the purpose of income tax, your earnings are considered to be £7,500. So you won't pay very much tax. But I don't know how it works with tax credits.

This seems to me like a fairly obvious and important question but I haven't been able to find a straight forward answer to it on the HMRC website or anywhere else online.

lorelai34

Well first of all they would actually base your claim on last years income(10-11). If the 11-12 income is going to be less then they will base it on that or if it increases by more than 10,000 compared to the year before.

Icequeen99

Aureus wrote: »

Hi,

I wonder if anyone can help me with a query.

As I understand it there's a certain income threshold for the Working Tax Credit (WTC), above which you're not entitled to anything. What I'd like to know is how does it work out if you only work part of the year.

Say half-way through the year you start a job with a salary of £15,000. You have been unemployed for the first six months so your total earnings in that tax year will actually only be £7,500. For the purpose of the WTC is your income considered to be £15,000 or £7,500?

I gather that, for the purpose of income tax, your earnings are considered to be £7,500. So you won't pay very much tax. But I don't know how it works with tax credits.

This seems to me like a fairly obvious and important question but I haven't been able to find a straight forward answer to it on the HMRC website or anywhere else online.

It depends on what you are doing in the first half of the year. As the other poster has said, tax credits are based initially on previous year income so it is your 10-11 income that is relevant to calculate 11-12 tax credits.

The exceptions to this rule are:

1. If 11-12 will be lower than 10-11, it is based on 11-12 (estimate first and then actual)

2. If 11-12 is higher than 10-11 by £10,000 or more, it will be based on 11-12 minus £10,000.

3. If you are on income-based jobseekers allowance, income based ESA, income support or pension credit in those first 6 months you get maximum tax credits for that period regardless of your income for 10-11 or 11-12.

Tax credits income is apportioned equally over a year, which often surprises people. So in your example, when calculating your award they would take your earnings for the tax year (either 10-11 or 11-12 depending on the rules above) divide by 365 and multiply by the days in your claim.

It can lead to overpayments where you get a good paid job mid way through the year because it spreads the income you earn in the 2nd half of the year across the whole year.

IQ

tamiami

They take your actual earnings at the end of the year. If you don't have a definate salary yet, but are earning less than the year before, they will base you tax credits on an estimate that you give them. They ususally hold some back just in case and will pay it to you in a lump sum in April if your earnings for the year dictate you were entitled to it. The thing you don't want is to be overpaid as they will want it back!

Aureus

Thanks for the answers guys. Looks like tax credits are a lot more complicated than I'd thought.

So the tax credits I receive this tax year will depend on what my income was last tax year and (strange as it may seem) this year's income is totally irrelevant (assuming it is neither less than last year's income nor more than £10k greater)?

tax credits are based initially on previous year income

They take your actual earnings at the end of the year.

The quotes above are open to the interpretation that the last tax year's income is only being used as a sort of provisional best guess of what I will earn this year, and that this initial estimate will be set aside at the end of the tax year once this year's earning are known. I take it that that is incorrect? (except in the special circumstances that income turns out to be lower or a lot higher than the last tax year)

Icequeen99

Aureus wrote: »

Thanks for the answers guys. Looks like tax credits are a lot more complicated than I'd thought.

So the tax credits I receive this tax year will depend on what my income was last tax year and (strange as it may seem) this year's income is totally irrelevant (assuming it is neither less than last year's income nor more than £10k greater)?

The quotes above are open to the interpretation that the last tax year's income is only being used as a sort of provisional best guess of what I will earn this year, and that this initial estimate will be set aside at the end of the tax year once this year's earning are known. I take it that that is incorrect? (except in the special circumstances that income turns out to be lower or a lot higher than the last tax year)

Initially is the right word to use. So you apply for tax credits, they use previous year income (unless you are getting an income related means tested benefit as I said above in which case you get maximum and all income is irrelevant for every day you get the other benefit).

Taking a simple situation where there are no changes during the year, after the tax year ends you are send some renewal forms asking you to confirm your actual income for the year just ended.

So for example, if you apply now (Nov 2011) you will be awarded tax credits for 2011-2012 based on your income for 2010-2011. Around May 2012, you will receive some renewal forms that ask you to confirm your actual 2011-2012 income.

HMRC then finalise your award for 2011-2012 by comparing your actual income for 2011-2012 vs. your 2010-2011 income. As I said above, they will finalise using previous year unless it rises by £10,000 or more or is less than previous year.

So it is correct to say initially, as once actual is known it may change to an actual basis. In many cases, it is initially based on previous year income and finalised on previous year income.

Hope that helps

IQ

Aureus

Thanks Icequeen99.

Yes, that's very helpful. Wasn't suggesting that your choice of words was incorrect, just wanted to clarify that you in fact meant what I thought you meant.