How do tax credits work?
How do Working Tax Credits work? How do you claim them? And what's the difference between Working Tax Credits and Universal Credit? Read on and we'll take a look...
Key points
Until they're officially withdrawn in April 2025, Working Tax Credits provide financial aid to low-income workers, aiming to reduce poverty and encourage employment, while Universal Credit consolidates various benefits into one, supporting low-income or unemployed individuals
As of April, Universal Credit replaces Working Tax Credits and other benefits, streamlining the system with payments based on broader needs assessments including income, family size, and housing
The application process for Universal Credit involves online eligibility checks, detailed form submissions, and interviews, with payments adjusted by individual circumstances and subject to compliance with set commitments
What are Working Tax Credits?
Working Tax Credits are financial support for employed individuals with low income and are intended to make work more rewarding and financially viable, as well as reduce poverty among workers and families.
Classified as a benefit, Working Tax Credits also provides extra income to cover everyday expenses. To qualify, applicants must meet specific criteria, including age, working hours, and income level.
What is Universal Credit?
Universal Credit is a payment designed to support individuals who are on a low income or out of work. It combines various benefits into a single payout.
This system was introduced to simplify the benefits system, by replacing six types of benefits (including Working Tax Credits) and ensures that working is more beneficial than claiming benefits alone.
When comparing Universal Credit with Working Tax Credits, it's crucial to understand the broader scope of Universal Credit.
While Working Tax Credits support those with low incomes from employment, Universal Credit also covers additional elements. These include provisions for children, housing, and other costs.
The introduction of Universal Credit has significantly impacted Working Tax Credits, which are being gradually phased out as Universal Credit is implemented across the UK.
This change aims to streamline benefits administration and reduce complexities by implementing a system with payments based on a broader assessment of needs, rather than just work income.
How does Universal Credit work?
Universal Credit supports UK individuals and families with low income or unemployment. Here's a snapshot of how it works...
Process of applying for universal credit:
First, verify eligibility online via the official government portal
Fill out the online form with details like income, capital, and household circumstances
Attend an interview at your local Jobcentre Plus to discuss your application and commitments
How payments are calculated and distributed:
Payments depend on individual circumstances such as income, rent, and childcare costs
A benefit cap may limit the total amount receivable, based on your location and situation
Payments are monthly, directly to your bank, aiding in financial management
Conditions and responsibilities of recipients:
Accepting a Claimant Commitment is mandatory, detailing responsibilities for employment or earning increases
Regular meetings with a work coach are essential to review progress and adjust commitments
Non-compliance with commitments can lead to sanctions, reducing your payment
How much can I claim?
When considering your claim for working tax credits and universal credit, several factors are crucial. These factors help estimate the financial support you might receive.
Income levels: Your household income primarily determines eligibility. Generally, a lower income increases the potential credit amount
Family size: The number of dependents in your household influences your claim. Larger families often qualify for more support
Working hours: Eligibility also depends on your working hours. You typically need to meet a minimum hour requirement
Childcare costs: If you incur childcare expenses, you may claim additional amounts to cover some costs
Disability: Extra provisions are available for individuals with disabilities, which can increase the claimable amount
By way of example, consider these examples of payment calculations:
A single parent working full-time on minimum wage might receive up to £2,000 annually in working tax credits
A couple with two children, earning £30,000 annually and paying for childcare, might claim about £3,500 per year
However, it's important to note the limits and caps on claims:
The maximum claim for Working Tax Credits is capped at approximately £3,040 per year for basic elements. Additional elements are available for children and disability
Universal Credit has a taper rate. This means that for every £1 earned over a certain threshold, your credit reduces by a specific percentage
These guidelines offer a clearer picture of potential claims. Always check the latest regulations or consult a financial advisor for accurate advice.
What happens if my income changes?
When your earnings fluctuate, it's crucial to report these changes. That means notifying the authorities managing your tax credits and universal credit claims.
This ensures your credit amounts are adjusted accurately, reflecting your current financial situation. You must inform them promptly—typically within one month of the change.
The adjustment process recalculates your entitlement based on your new income. This might increase or decrease the financial support you receive.