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HMRC internal manual

Tax Credits Manual

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HM Revenue & Customs
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Miscellaneous (A to B): Income limits - calculation (Info)

The tax credits income limit calculation follows five steps.

Step 1 - Identify if income limits are needed

Income limits are calculated for the year of each award, unless

  • a customer is in receipt of Income Support (IS), income-based Jobseeker’s Allowance (JSA(IB)), income-related Employment and Support Allowance (ESA(IR)) or Pension Credit (PC) throughout the last entitlement period in the award period

or

  • the customers have notified income for that year as part of the End of Year finalisation.

Step 2 - Identify the taper category for each entitlement period in the award period

Taper categories identify what effect family income had on the award for an entitlement period and how sensitive the award is to further income change.

There are five taper categories into which any entitlement period can fall.

  • No tapering - where a customer is in receipt of IS, JSA(IB), ESA(IR) or PC. This means that the income does not affect the award.
  • Low income - where the income amount used in the award calculation for the entitlement period is below the taper start point of the first entitlement to be tapered (in the taper sequence) and so no tapering is applied to the award for that entitlement period.
  • Taper slope - where only part of an entitlement is payable for the entitlement period. This means that one of the entitlements for the entitlement period has been reduced by a taper amount, but not to nil.
  • Plateau case - where the WTC Work, WTC Childcare and CTC Child elements have been tapered to nil for the entitlement period, but the CTC Family element has not been tapered.

Note: From April 2012, the second income threshold has been withdrawn and tapering will continue. This means that plateau cases will no longer occur for claims received on or after 06-04-2012.

  • Nil award - where the total tax credits award amounts have been tapered to nil. These are referred to as ‘Nil Award’ cases.

Note: The CTC taper rate increased to 41% on 06-04-2011.

Note: The CTC taper rate was withdrawn on 06-04-2012

Step 3 - Apply the rules for each taper category to calculate an upper and lower limit amount for each entitlement period

No Tapering - neither income limit should be calculated for these entitlement periods.

The rules for other ‘taper categories’ depend on whether the award calculation was based on

  • Previous Year (PY) income
  • Current Year (CY) income - CY income would be used because it exceeded the PY income by more than the Income Increase Allowance amount for the year (currently £2,500) - referred to as ‘CY Higher’. For the current IIA, use TCM0132420.
  • Current Year (CY) income - CY income would be used because it was lower than the PY income - referred to as ‘CY Lower’.

These rules are as follows

Award calculated using PY income

The income limit rules for each taper category are

  • Low income

    • The Upper Limit is the taper start point of the lowest entitlement (in taper order) to which the family is entitled, plus the Income Increase Allowance for the year
    • The Lower Limit does not apply - this is because a fall in income cannot increase the entitlement.
  • Taper Slope

    • The Upper Limit. If the total tapered award (that is, not just one entitlement period) is less than the minimum payable annual award amount (£26), the Upper Limit would be zero. Otherwise, it’s the PY income plus the Income Increase Allowance for the year.
    • The Lower Limit is the PY income.
  • Plateau Case

    • The Upper Limit is the taper start point for the CTC Family element plus the Income Increase Allowance for the year.
    • The Lower Limit is the taper end point for the CTC Child element.

    Note: From April 2011, the CTC income threshold decreased to £40,000.

    Note: From April 2012, the second income threshold of £40,000 has been withdrawn and tapering will continue. This means that plateau cases will no longer occur for claims received on or after 06-04-2012.

  • Nil Award

    • The Upper Limit does not apply because an increase in income cannot increase the entitlement.
    • The Lower Limit is the taper end point of the last entitlement that was tapered. This would be the first entitlement that a fall in income could make payable.

Award calculated using CY Lower Income

The income limit rules for each taper category are

  • Low Income

    • The Upper Limit is the taper start point of the lowest entitlement (in taper order) awarded.
    • The Lower Limit does not apply. This is because any fall in income cannot increase entitlement.
  • Taper Slope

    • The Upper Limit. If the total tapered Award (that is, not just one entitlement period) is less than the minimum payable annual award amount (£26), the Upper Limit does not apply. This is because an increase in income cannot reduce the entitlement. In all other cases, the Upper Limit is the CY income.
    • The Lower Limit is the CY income.
  • Plateau Case

    • The Upper Limit is the taper start point for the CTC Family element. This is the element that would next be affected by an increase in income.
    • The Lower Limit is the taper end point for the CTC Child element. This is the element that would first be affected by a fall in income.

    Note: From April 2012, the second income threshold has been removed and tapering will continue. This means that plateau cases will no longer occur for claims received on or after 06-04-2012.

  • Nil Award

    • The Upper Limit does not apply. This is because an increase in income cannot reduce the entitlement.
    • The Lower Limit is the value of the taper end point of the last entitlement tapered for the period. This would be the first entitlement that a fall in income could make payable.

Award calculated using CY Higher income

  • Low income

    • Upper Limit and Lower Limit are determined in the same way as if the award was calculated using PY income.
  • Taper Slope

    • Upper Limit and Lower Limit are determined in the same way as if the award was calculated using CY Lower income.
  • Plateau Case

    • The Upper Limit is the higher of

    • the taper start point for the CTC Family element. This is the element that would next be affected by an increase in income

    or

    • the CY income.

    • The Lower Limit is the taper end point for the CTC Child element (this is the element that would first be affected by a fall in income), plus the Income Increase Allowance for the year.

    Note: From April 2012, the second income threshold has been removed and tapering will continue. This means that plateau cases will no longer occur for claims received on or after 06-04-2012.

  • Nil Award

    • Upper Limit and Lower Limit are determined in the same way as if the award was calculated by using the CY Lower income.

What happens when the entitlement period does not cover the full tax credit year?

The taper start point, taper end point and income amounts calculated for the entitlement period from the main award calculation allow the income band ‘taper category’ for the entitlement period to be determined.

However, annual amounts are needed for the Lower Limit and Upper Limit calculations. Where the income limit rule relevant to the income used in the calculation (for example, PY) and income band taper category for the entitlement period (for example, Taper slope) refers to

  • PY or CY income. The annual amount of that income is used to calculate the Lower Limit or Upper Limit and where adjustment is specified, is adjusted by the annual amount for the Income Increase Allowance for the year.
  • an entitlement’s Taper Start Point. The annual default taper start point for that entitlement is used to calculate the Lower or Upper Limit and, where adjustment is specified, is adjusted by the annual amount of the Income Increase Allowance for the year.
  • an entitlement’s Taper End Point. The taper end point already calculated for the entitlement for the entitlement period is annualised by dividing by the number of days in the entitlement period and multiplying by the number of days in the tax credits year (rounding up the annual result to the nearest penny). Where adjustment is specified, the annualised Taper end point is adjusted by the annual amount of the Income Increase Allowance for the year.

Step 4 - Identify the final upper income limit amount and lower income limit amount for the year

The upper and lower income limits calculated for each entitlement period not in the ‘No tapering’ category should then be compared. The final amounts are determined as follows

  • Upper income limit - this is the lowest of the Upper income limits calculated for the entitlement periods (excluding zeros), rounded up to the nearest whole pound.
  • Lower income limit - this is the highest of the Lower income limits calculated for the entitlement periods, rounded down to the nearest whole pound.

Step 5 - Identify the need for conversion into end of year income limits

Conversion is required if the award being calculated is for a previous tax year that was selected for finalisation by auto-renewal.

If conversion is required, it is carried out. Otherwise, the income limits from step 4 are the income limits for the award for the year.