Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Tax Credits Technical Manual

From
HM Revenue & Customs
Updated
, see all updates

Calculation of entitlement: a worked example

Worked example

Case Details

Two single parents had been claiming tax credits in their own right, each with one child.  From 02-05-2015 they make a new claim to tax credits as a couple in a new household. The effective date of claim is therefore 02-05-2015 (DOC).

Claimant 1 details are

  • Date of birth (DOB) is 30-04-1969 (aged 46 at DOC 02-05-2015)

 

  • Works 16 hours per week

 

Claimant 2 details are

  • DOB is 01-08-1966 (aged 48 at DOC 02-05-2015)
  • Works 16 hours per week

Children are

  • DOB is 20-09-1998 (aged 16 at DOC 02-05-2015)

And

  • DOB is 08-07-2011 (aged 3 at DOC 02-05-2015)

Income is

  • For 2014/15 tax year - £27,500.00

Childcare is

  • 48 weeks at £50.00 and 4 weeks holiday at £20.00 for the 3 year old only.

(48 x £50.00 = £2,400.00 and 4 x £20.00 = £80.00, therefore £2,480.00 for the year)

Note: The claim has been found to satisfy both the Working Tax Credit (WTC) and Child Tax Credit (CTC) eligibility rules and an award calculation is required.

Step 1 - Establishing the award and relevant period(s)

The award period will be from the effective date to the end of the tax year, which is 02-05-2015 to 05-04-2016

Entitlement period(s)

The eligibility rules identify that the following elements are due from 02-05-2015

  • WTC - basic element
  • WTC - second adult element
  • WTC - 30 hour element
  • WTC - childcare element
  • CTC - child element for two children
  • CTC - basic family element

For an initial award, eligibility to the CTC child element is assumed to end on the 31st of August on or following the child’s 16th birthday. The eldest child was 16 on the 20th September the previous year, 2014.  However, because their 16th birthday was after the 31st August 2013 their entitlement continues into this year, until the 31st August 2015.  Therefore a change in eligibility needs to be taken into account from 01-09-2015 because of the child with the DOB of 20-09-1998.

Two relevant periods will be considered in the award calculation

  • 02-05-2015 to 31-08-2015

and

  • 01-09-2015 to 05-04-2016

Step 2 – Calculating the maximum tax credit entitlement for each entitlement period

Entitlement period 02-05-2015 to 31-08-2015

Number of days in the period = 122

Element maximum amounts

 

Element Calculation Maximum amount
     
WTC – basic element    
£1,960/366 =£5.355 per day Round up to £5.36 per day x 122 days £653.92  

 

£1,595.76  
  WTC – second adult element
£2,010/366 = £5.491 per day Round up to £5.50 per day x 122 days £671.00
  WTC - 30 hour element  
£810/366 = £2.213 per day Round up to £2.22 per day x 122 days £270.84
  WTC - childcare element  
£2,480/52 = £47.692 per week Weekly amount rounded up to nearest pound = £48.00
£48 x 52/366 x 122 = £831.999 70% of £831.999 & rounded up to nearest penny £582.40
  CTC – child element  
£2,780/366 = £7.595 per day Round up to £7.60 per day x 122 days £927.20 x 2 = £1,854.40
  CTC – family element  
£545/366 = £1.489 per day Round up to £1.49 per day x 122 days £181.78

 

Entitlement period 01-09-2015 to 05-04-2016

Number of days in period = 218

Element maximum amounts

 

Element Calculation Maximum amount
     
WTC – basic element    
£1,960/366 = £5.355 per day Round up to £5.36 per day x 218 days £1,168.48  

 

£2,851.44  
  WTC – second adult element
£2,010/366 = £5.491 per day Round up to £5.50 per day x 218 days £1,199.00
  WTC - 30 hour element  
£810/366 = £2.213 per day Round up to £2.22 per day x 218 days £483.96
  WTC - childcare element  
£2,480/52 = £47.692  per week Weekly amount rounded up to nearest pound = £48.00
£48 x 52/366 x 218 = £1,486.688 70% of £1,486.688 & rounded up £1,040.69
  CTC – child element  
£2,780/366 = £7.595 per day Round up to £7.60 per day x 218 days  x 1 child £1,656.80
  CTC – family element  
£545/366 = £1.489 per day Round up to £1.49 per day x 218 days £324.82

 

Step 3 – Applying Taper If Income Involved

Entitlement period 02-05-2015 to 31-08-2015

Number of days in the period = 122

  1. Establish the income and the initial income threshold amounts for the relevant periods
  • WTC is included in the award for the period, therefore the initial income threshold is £6,420 / 366 x 122 = £2,140.000, rounded up = £2,140.00.
  • Annual income is £27,500, therefore income for the period is £27,500 / 366 x 122 = £9,166.666 and rounded down = £9,166.66.
  1. Consider if a taper calculation is required
  • Income of £9,166.66 is greater than the initial income threshold of £2,140.00 therefore a taper calculation is required.
  1. Taper the first entitlement
  • The entitlement, in the award for the period, which appears highest in the required taper order, is the WTC work elements entitlement.
  • The taper amount to be applied to this entitlement is £9,166.66 (income) minus £2,140.00 (initial income threshold) which gives £7,026.66.  
  • Then multiply by 41% (taper rate) = £2,880.930.
  • The taper amount of £2,880.930 is higher than the maximum entitlement amount £1,595.76 so all of this entitlement to WTC has been tapered away and will no longer be due. WTC = NIL
  1. Taper the second entitlement
  • The entitlement in the award for the period, which appears next highest in the required taper order is the WTC childcare element entitlement.
  • As the working elements of WTC have been reduced to nil, the childcare element of WTC is worked out as follows.
  • The taper amount to be applied to this entitlement is £9,166.66 (income) minus £2,140.00 (initial income threshold) = £7,026.66
  • Then multiply by 41% (taper rate) = £2,880.930
  • The taper amount of £2,880.930 minus the max WTC elements (excluding childcare) of £1,595.76 give the excess of £1,285.170
  • The excess amount of £1,285.170 is higher than the maximum childcare element of £582.40 so all of this entitlement to WTC childcare has been tapered away and will no longer be due. WTC childcare = NIL.
  1. Taper the third entitlement
  • The entitlement, in the award for the period, which appears next highest in the required taper order is the CTC individual elements entitlement.
  • As the WTC childcare elements have been reduced to nil, the CTC individual elements are worked out as follows
  • CTC individual elements have a minimum income threshold of £16,105.00.  This threshold is compared with the amount used to taper the previous WTC work elements and WTC childcare elements to nil.  Comparison of the two resulting tapers provides the highest figure, which is used in calculating entitlement to the individual elements of CTC.
  • Establish the amount used to taper the previous elements to nil.  This is the WTC work elements of £1,595.76 plus the WTC childcare amount £582.40 (£2,178.16) then divided by the taper rate 0.41 = £5,312.585, added to the initial income threshold £2,140.00= £7,452.59 rounded up.
  • Establish the minimum income threshold for the entitlement period.  This is the CTC minimum income threshold of £16,105.00 divided by 366 days and multiplied by the number of days in the period, 122 = £5,5368.3333 and rounded up = £5,368.34.
  • A comparison of the two taper figures £7,432.61 and £5,368.34 is made. The highest figure of £7,452.59 is used as the income threshold.
  • Income of £9,166.66 is higher than the income threshold of £7,452.59 so a taper amount needs to be calculated.
  • The taper amount to be applied to this entitlement is £9,166.66 (income) minus £7,452.59 (income threshold) = £1,714.07
  • Then multiplied by 41% (taper rate) = £702.7687
  • The taper amount of £702.7687 is less than the entitlement maximum amount £1,854.40 so the taper amount is deducted from CTC to find the net amount due = £1,151.6313 rounded up = £1,151.64 = the CTC individual element.
  1. Taper the fourth entitlement
  • The entitlement in the award for the period, which appears next highest in the required taper order is the CTC family element entitlement.
  • As the CTC individual elements have only been partly tapered away, the CTC family element is worked out as follows.
  • The CTC family element has a minimum income threshold of £16,105.00.  This threshold is compared with the amount used to taper the previous WTC work elements, WTC childcare elements and CTC individual elements.  Comparison of the two resulting tapers provides the highest figure, which is used in calculating entitlement to the CTC family element.
  • Establish the amount used to taper the previous elements.  This is the WTC work elements of £1,595.76 plus the WTC childcare amount of £582.40 plus the CTC individual elements of £1,854.40 (a total of £4,032.56) then divided by the taper 0.41 = £9,835.5121, added to the initial income threshold £2,140.00 = £11,975.52.
  • Establish the minimum income threshold for the entitlement period.  This is the CTC minimum income threshold of £16,105.00 divided by 366 days multiplied by the number of days in the period, 122 = £5,368.3333 and rounded up to £5,368.34.
  • A comparison of the two taper figures £11,975.32 and £5,368.34 is made. The highest figure of £11,975.52 is used as the income threshold.
  • Income of £9,166.66 is lower than the income threshold of £11,975.52 so a taper amount does not need to be calculated. The CTC family element of £181.78, will therefore be due in full.

Summary of calculation for entitlement period 02-05-15 to 31-08-15 within the award period - 02-05-2015 to 05-04-2016

Entitlement period – 02-05-2015 to 31-08-2015

 

 

Entitlement Maximum amount Taper amount Net amount due
       
WTC Work Elements £1,595.76 £1,595.76 Nil
WTC Childcare Elements £582.40 £582.40 Nil
CTC Individual Elements £1,854.40 £702.76 £1,151.64
CTC Family Elements £181.78 Nil £181.78

 

Entitlement period 01-09-2015 to 05-04-2016

Number of days in the period = 218

  1. Establish the income and the initial income threshold amounts for the relevant periods.
  • WTC is included in the award for the period, therefore the initial income threshold is £6,420 / 366 x 218 = £3,823.934 and rounded up = £3,823.94
  • Annual income is £27,500 therefore income for the period is £27,500 / 366 x 218 = £16,379.781 and rounded down = £16,379.78
  1. Is a taper calculation required?
  • Income £16,379.78 is greater than the initial income threshold £3,823.94, therefore a taper calculation is required.
  1. Taper the first entitlement
  • The entitlement, in the award for the period, which appears highest in the required taper order is the WTC work elements entitlement.
  • The taper amount to be applied to this entitlement is £16,379.78 (income) minus £3,823.94 (initial income threshold) = £12,555.84.
  • Then multiply by 41% (taper rate) = £5,147.894
  • The taper amount of £5,147.894 is higher than the maximum entitlement amount of £2,851.44 so all of this entitlement to WTC has been tapered away and will no longer be due. WTC = NIL.
  1. Taper the second entitlement
  • The entitlement in the award for the period, which appears next highest in the required taper order is the WTC childcare element entitlement.
  • As the working elements of WTC have been reduced to nil, the childcare element of WTC is worked out as follows.
  • The taper amount to be applied to this entitlement is £16,379.78 (income) minus £3,823.94 (initial income threshold) = £12,555.84.
  • Then multiply by 41% (taper rate) = £5,147.894
  • The taper amount of £5,147.894 minus the max WTC elements (excluding childcare) of £2,851.44 gives the excess of £2,294.454.
  • The excess amount of £2,296.454 is higher than the maximum childcare element of £1,040.69 so all of this entitlement to WTC childcare has been tapered away and will no longer be due. WTC childcare = NIL.
  1. Taper the third entitlement
  • The entitlement, in the award for the period, which appears next highest in the required taper order is the CTC individual elements entitlement.
  • As the childcare elements have been reduced to nil, the CTC individual elements are worked out as follows
  • CTC individual elements have a minimum income threshold of £16105.00.  This threshold is compared with the amount used to taper the previous WTC work elements and WTC childcare elements to nil.  Comparison of the two resulting tapers provides the highest figure, which is used in calculating entitlement to the individual elements of CTC.
  • Establish the amount used to taper the previous elements to nil.  This is the WTC work elements of £2,851.44 plus the WTC childcare amount £1,040.69 (£3,892.13) then divided by the taper rate 0.41 = £9,493.00, added to the initial income threshold £3,823.94 = £13,316.94 (rounded up).
  • Establish the minimum income threshold for the entitlement period.  This is the CTC minimum income threshold of £16,105.00 divided by 366 days and multiplied by the number of days in the period, 218 = £9,592.595 and rounded up = £9,592.60.
  • A comparison of the two taper figures £13,316.94 and £9,562.60 is made. The highest figure of £13,316.94 is used as the income threshold. 
  • Income of £16,379.78 is higher than the income threshold of £13,316.94 so a taper amount needs to be calculated.
  • The taper amount to be applied to this entitlement is £16,379.78 (income) minus £13,316.94 (income threshold) = £3062.84.
  • Then multiplied by 41% (taper rate) = £1,255.764
  • The taper amount £1,255.764 is less than the entitlement maximum amount £1,656.80 so the taper amount is deducted from CTC to find the net amount due = £401.036 and rounded up = £401.04 = the CTC individual element.

Note: The rate of CTC individual elements entitlement is lower in the second entitlement period in response to the loss of the child element for the 16 year old child who did not go on to meet the conditions for qualifying young person element.

  1. Taper the fourth entitlement
  • The entitlement in the award for the period, which appears next highest in the required taper order is the CTC family element entitlement. 
  • As the CTC individual elements have only been partly tapered away, the CTC family element is worked out as follows.
  • The CTC family element has a minimum income threshold of £16,105.00.  This threshold is compared with the amount used to taper the previous WTC work elements, WTC childcare elements and CTC individual elements.  Comparison of the two resulting tapers provides the highest figure, which is used in calculating entitlement to the CTC family element.
  • Establish the amount used to taper the previous elements.  This is the WTC work elements of £2,851.44 plus the WTC childcare amount of £1,040.69 plus the CTC individual elements of £1,656.80 (a total of £5,548.93) then divided by the taper 0.41 = £13,533.975, added to the initial income threshold £3,823.94 = £17,357.91.
  • Establish the minimum income threshold for the entitlement period.  This is the CTC minimum income threshold of £16,105.00 divided by 366 days multiplied by the number of days in the period, 218 = £9,592.595 and rounded up to £9,592.60.
  • A comparison of the two taper figures £17,357.91 and £9,592.60 is made. The highest figure of £17,357.91 is used as the income threshold.
  • Income of £16,379.78 is lower than the income threshold of £17,357.91 so a taper amount does not need to be calculated. The CTC family element of £324.82, will therefore be due in full.

Summary of calculation for entitlement period 01-09-15 to 05-04-16 within the award period – 02-05-2015 to 05-04-2016

Entitlement period – 01-09-2015 to 05-04-2016

 

 

Entitlement Maximum amount Taper amount Net amount due
       
WTC Work Elements £2,851.44 £2,851.44 Nil
WTC Childcare Elements £1,040.69 £1,040.69 Nil
CTC Individual Elements £1,656.80 £1,255.76 £401.04
CTC Family Elements £324.82 Nil £324.82

 

Step 4 – Summary for the total tax credit due for each entitlement period

 

 

Entitlement 02/05/15 to 31/8/15 01/09/15 to 05/04/16
     
WTC work elements entitlement Nil Nil
WTC child care elements entitlement Nil Nil
CTC individual elements entitlements £1,151.64 £401.04
CTC family element entitlement £181.78 £324.82

 

The award calculation is complete.

Total award for the year

NIL (WTC)

£1,151.64 + £181.78 = £1,333.42 (CTC 122 days)

£401.04 + £324.82 = £725.86 (CTC 218 days)

Therefore total tax credits due for the year = £1,333.42 + £725.86 =£2,059.25 from 02/05/15 to 05/04/16