How to work out tax credits for short periods - an example

This example shows how tax credits are worked out if you qualify for both Working Tax Credit and Child Tax Credit for part of a year, or if your circumstances change. It's based on the tax credits rates and income limits up to 5 April 2012. It will be updated on 6 April 2012.

You qualify for both Working Tax Credit and Child Tax Credit

For the purpose of this example, these are your circumstances:

you are two single parents who had been claiming tax credits in their own right but you now live together
you both work 16 hours a week
each of you has a child under 16
your joint childcare cost is £2,480 a year
your joint annual income is £27,500
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 2011 to 31 August 2011 - a total of 122 days.

Step one - working out your income for the period

Your joint annual income is £27,500. The annual limit before your tax credits are reduced is £6,420. Because you're not entitled to tax credits for a full year, both these figures are worked out over the shorter period on a 'pro rata' basis.

The income limit – how to pro-rata

The income limit is worked out on a pro rata basis for the 122 days as follows:

£6,420 ÷ 366 x 122 = £2,140.

This gives a pro-rata income limit of £2,140.

Your income – how to pro-rata

Your income for the 122 day period is also worked out on a pro rata basis as follows:

£27,500 ÷ 366 x 122 = £9,166.67.

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

If you were entitled to tax credits for a whole year, the most you would get would be made up of:

Working Tax Credit basic element of £1,920
Working Tax Credit couples element of £1,950
Working Tax Credit 30 hour element of £790
Working Tax Credit childcare element (70 per cent of £2,480) of £1,736
Child Tax Credit child element (£2,555 per child) of £5,110
Child Tax Credit family element of £545

Working out entitlement for part of the year

As you’re only entitled to tax credits for 122 days, each amount is reduced. For all elements, except the childcare element, this is worked out as follows:

divide the annual amount for each element by 366
round this figure up to the nearest penny to get the daily rate
multiply the daily rate by 122, which is the number of days that you're entitled

The Working Tax Credit childcare element is worked out differently, as follows:

divide the annual amount by 52
round this figure up to the nearest £1 to get the weekly rate
multiply the weekly rate by 52
divide it by 366
multiply it by the number of days in the period
multiply again by 70 per cent
round this figure up to the nearest penny

The maximum amount of tax credits you are entitled to

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

Element	Daily rate	The most you can get
Working Tax Credit basic element	£5.25	£640.50
Working Tax Credit couples element	£5.33	£650.26
Working Tax Credit 30 hour element	£2.16	£263.52
Working Tax Credit childcare element	-	£582.40
Child Tax Credit child element (the amount shown is for two children)	£13.97	£1,704.34
Child Tax Credit family element	£1.49	£181.78
Total		£4,022.80

Step three - working out your award

If your income is over the pro-rata limit, the elements you qualify for are reduced in a certain order.

What's reduced first?

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

In this example, the Working Tax Credit elements you'd be entitled to are:

basic element of £640.50
couples element of £650.26
30 hour element of £263.52

This makes a total of £1,554.28 that you'd be entitled to.

How these elements are reduced

The basic, couples and 30 hours elements are added together and reduced as follows:

Steps involved	Amount (£)
Income for the period	9,166.67
Less income limit for the period	-2,140
Income above the income limit	7,026.67
Multiply by 41% (the rate at which Working Tax Credit elements - apart from the childcare element - is reduced)	2,880.93
Reduced amount of basic, couples and 30 hours elements	2,880.93

The elements you'd be due

The reduced amount of £2,880.93 is higher than the £1,554.28 you'd be entitled to.

This means you won't get the basic element, second adult element or 30 hour element.

What's reduced second?

The Working Tax Credit childcare element is reduced second. The most you'd be entitled to is £582.40 (as worked out in step 2).

How the reduced amount of Working Tax Credit childcare element is worked out

The amount of Working Tax Credit childcare element is worked out as follows:

Steps involved	Amount (£)
Income for the period	9,166.67
Less income limit for the period	-2,140
Income above the income limit	7,026.67
Multiplied by 41% (the rate at which the Working Tax Credit childcare element is reduced)	2,880.93
Less Working Tax Credit entitlement apart from childcare	-1,554.28
The difference	1,326.65

How much Working Tax Credit childcare element you’re due

The difference of £1,326.65 is higher than the £582.40 you'd be entitled to.

This means you won't get the Working Tax Credit childcare element.

What's reduced third?

The Child Tax Credit child elements are reduced third.

In this example, the Child Tax Credit family element isn't reduced because your annual income is less than £40,000.

The income limit for Child Tax Credit

Because all the Working Tax Credit has been reduced to nil, the income limit of £2,140 that was worked out in step one is no longer used. So a new income limit is used. This is the higher of:

the £15,860 Child Tax Credit income limit - adjusted for the length of the period (which in this case is 122 days)
the amount used to reduce the previous Working Tax Credit elements to nil

The Child Tax Credit income limit is worked out as follows:

£15,860 ÷ 366 x 122 = £5,286.67

The amount used to reduce the Working Tax Credit elements to nil is worked out as follows:

Steps involved	Amount (£)
Working Tax Credit work elements	1,554.28
Plus Working Tax Credit childcare element	582.40
	Total 2,136.68
Divided by 41%	5,211.41
Plus Working Tax Credit income limit	2,140
Total	7,351.41

Because £7,351.41 is higher than your Child Tax Credit income limit (£5,286.67), the income limit of £7,351.41 is used.

How your Child Tax Credit elements are reduced

Using the new income limit of £7,351.41, the child elements are reduced as follows:

Steps involved	Amount (£)
Income for the period	9,166.67
Less new income limit for the period	-7,351.41
Income above income limit	1,815.26
Multiplied by 41%	744.26
Child Tax Credit child element you're entitled to (as worked out in step two)	1,704.34
Less reduced amount	-744.26
Amount of Child Tax Credit child element due	960.08

How much Child Tax Credit you’re due

You’re due:

£960.08 - for the child element
£181.78 - for the family element

This is a total of £1,141.86.

Step four - 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	£1,554.28	£2,880.93	Nil
Working Tax Credit childcare elements	£582.40	£1,326.65	Nil
Child Tax Credit child elements	£1,704.34	£744.26	£960.08
Child Tax Credit family element	£181.78	Nil	£181.78
Total payment due			£1,141.86