WTC childcare costs and earmnings adjustment

bikeman

Hi, how tax credit help with child care costs and teh earnings adjustment work?

I am aware that wtc pays 70% of child care upto £300 a week but I also know that WTC is reduced by 41% for everything earned over £6420 pa.

Does that mean if you earn over £6420 you end up with only 29% of your child care costs paid?

Thanks

Icequeen99

Not necessarily.

How it works is that you work out your maximum tax credits by adding up:

Working tax credit elements (except childcare)
Working tax credit childcare (the 70% costs here)
Child tax credit (including family element).

The maximum is then reduced 41p in the £ for income over £6420. It is reduced by first taking the WTC elements, then the childcare, then the CTC.

So you have a way above the £6,420 before it gets to the childcare element. It depends on how much you get in other WTC elements really. For example if you get WTC disability element it will take more income before the 41% reduction gets into your childcare element.

It also means that some people will get more child tax credit than they would have even if they get Nil childcare element - just by including childcare costs in the calculation.

IQ

bikeman

IQ, I cant see why you differentiate between the order in which the various elements of CTC/WTC/childcare are reduced for earnings. A £1 reduction is a £1 reduction, it doesn't matter which element is actually reduced.

Icequeen99

bikeman wrote: »

IQ, I cant see why you differentiate between the order in which the various elements of CTC/WTC/childcare are reduced for earnings. A £1 reduction is a £1 reduction, it doesn't matter which element is actually reduced.

I suppose it is relevant only to how much of the childcare element you actually get.

In regards to your original question, once you are above the point of 6,420 then tapering takes place. But until all of the WTC is tapered away by income, you get all of your childcare costs covered. Only once WTC is tapered would they start to take out of the childcare costs.

So say that point is £17,000 in a particular case you will get the full 70% of your childcare costs covered until that point.

IQ

zagfles

bikeman wrote: »

Hi, how tax credit help with child care costs and teh earnings adjustment work?

I am aware that wtc pays 70% of child care upto £300 a week but I also know that WTC is reduced by 41% for everything earned over £6420 pa.

Does that mean if you earn over £6420 you end up with only 29% of your child care costs paid?

Thanks

You can't just subtract the percentages, as they apply to different things! The 70% applies to childcare costs, the 41% taper applies to earnings. Plus the taper applies to the total award, not each element, so you don't get more tapering on the same income because you're claiming the childcare element.

Basically, as long as you'd be eligible to tax credits without the childcare, then you get 70% of the childcare costs paid as extra tax credits (as IQ points out this might be additional CTC rather than the childcare element).

As an example, if you earn £30000 and have 2 kids, without childcare you'd get £997.20 in CTC (10665 minus 41% of income over 6420).

If you had childcare costs of £200pw, you'd get £8277.20 (10665+200*52*0.7 minus 41% of income over 6420). Most would be in additional CTC with a little in WTC. But the bottom line is you get 70% of the childcare costs paid in extra tax credits.

It's a different equation if you're working out whether it's worth incurring childcare costs/extra childcare costs by working extra hours (ie increasing earnings and childcare), but that will depend on how much your earnings increase in proportion to childcare, they are unlikely to be the same.