Confused about tax credits calculation

Love_the_minions

Some may have read my previous post regarding still claiming for the childcare element of WTC whilst also using the 15hrs free for 3-4 year olds.

This lead me to get out our annual award notice to just see how much we actually do get towards the childcare. Have to admit in the past I have just checked that all the circumstances are correct then jumped to the last page to see how much we will get a month and not really bothered with all the calculations stuff in the middle.

I was really surprised at how low the WTC childcare element was compared to our costs as I wouldn't class us as high earners. This lead me to thinking we could just about afford to still pay out for the childcare but not claim for it as we could manage on the child element and family element. But when entering our details on the entitled to calculator without the childcare instead of the £230 a month CTC I was expecting (being our current award less the childcare element) it was only £64!!

Just to point out i'm not complaining i'm just confused, why the need for the specific childcare element on WTC when some of the help you receive towards childcare must also come from the CTC child element and family element. I've tried to search on google and the hmrc website but found nothing to suggest that the child/family elements should be affected by your childcare fees or lack thereof.

Can anyone explain to ease my confusion???

Icequeen99

Love_the_minions wrote: »

Some may have read my previous post regarding still claiming for the childcare element of WTC whilst also using the 15hrs free for 3-4 year olds.

This lead me to get out our annual award notice to just see how much we actually do get towards the childcare. Have to admit in the past I have just checked that all the circumstances are correct then jumped to the last page to see how much we will get a month and not really bothered with all the calculations stuff in the middle.

I was really surprised at how low the WTC childcare element was compared to our costs as I wouldn't class us as high earners. This lead me to thinking we could just about afford to still pay out for the childcare but not claim for it as we could manage on the child element and family element. But when entering our details on the entitled to calculator without the childcare instead of the £230 a month CTC I was expecting (being our current award less the childcare element) it was only £64!!

Just to point out i'm not complaining i'm just confused, why the need for the specific childcare element on WTC when some of the help you receive towards childcare must also come from the CTC child element and family element. I've tried to search on google and the hmrc website but found nothing to suggest that the child/family elements should be affected by your childcare fees or lack thereof.

Can anyone explain to ease my confusion???

It isn't easy to explain. Basically, due to how tax credits work, sometimes you can get more Child Tax Credit by including childcare costs in the calculation that you would if you didn't. So you are still getting extra help by having the childcare costs it is just part of that help is coming through increased CTC rather than childcare element itself.

The more complicated explanation is that it works like this. When they work out tax credits they look at WTC and CTC. They first work out the maximum amount they will gave you for your circumstances, for example:

WTC basic element 1920
WTC couple element 1970
WTC 30 hr element 790
WTC childcare £3000
CTC child 1 £2720
CTC child 2 £2720
Family element £545

TOTAL: £13,665

Now this is the absolute maximum you can get in the circumstances listed above, obviously everyone's maximum is different.

But the maximum is then reduced by 41p for every £1 of income above £6,420 (where you get WTC and CTC). So they reduce the 13,665. So if your income was say £30,000 - the reduction due to income will be £9668.

However they don't just reduce the 13,665 by 9668. The reduction due to income is taken off in a certain order. It is this order that causes the result you have noticed.

So first they use the reduction due to income against the WTC basic, couple and 30 hr elements which accounts for £4680 of the reduction. But that still leaves £4988 reduction to take off.

They next take it off the childcare element. In this example, that is £3000 so they get nil childcare. That leaves £1988 of reduction to take off the CTC. That means this family would get £3997 as their award .

However, if you take out the childcare element so there are no childcare costs, the reduction due to income of £9668 is the same. But because the childcare costs aren't there to eat up some of that reduction, it hits CTC quicker. So this family, without childcare, would get less CTC that they are now.

In your case, your income must be at a level where the reduction due to income is just eating into your childcare element, but leaves some of it and you are getting maximum CTC. But when you take the childcare element out, the reduction in income then has to eat into your CTC which is why you would get less.

It is really complicated, there isn't an easy way to explain it but it is correct.

IQ