Tax credits: what they are, and how to apply for them

calculating finances

What are tax credits?

Tax credits are payments from the government. If you're responsible for at least one child or young person, you may qualify for Child Tax Credit. If you work, but are on a low income, you may qualify for Working Tax Credit. You can often get both types of tax credits. They aren't taxable. Here's the lowdown on tax credits and how to apply.

Nine out of 10 families with children qualify for tax credits, but you don't need to have children to claim. You may also qualify if you're working and on a low income.

"If a person with several children moves into a low-paid job then it is very likely they will earn less than they receive in benefits. The same is likely to be true even for someone with a small family if they can only find part-time work. This means that without any in-work benefits, some people will be actually worse off in work - there is a disincentive to get a job. Working tax credits are meant to get rid of this disincentive." Takver 

How much you get depends on things like how many children you have living with you, whether you're in a couple, whether you work (and how many hours) and whether you pay for childcare.

"I'm a single mum (didn't start out that way). I work 30 hours a week (less than average salary) and couldn't work if I didn't get help from tax credits. I would really hate not to work... I always have done. For me, tax credits have been a real life-saver." Janos

Your payments depend on your income: the lower your income, the more tax credits you get. HMRC has a calculator so you can work out if you qualify. 

The annual income limit that applies in working out whether you can claim tax credits may be higher if you pay for approved childcare or if you or your partner is disabled.

The tax credit calculation is pretty complicated - if you want help working out what you might be eligible for, talk to an experienced adviser at a Citizens Advice Bureau. 

How to apply for Child Tax Credit

Contact the Tax Credit Helpline on 0345 300 3900 (text phone 0345 300 3909) for an application pack. The application form for your first claim is Form TC600. You apply for Working Tax Credit on the same form.

The application form requires a lot of information, including your income for the previous tax year. So if your income is going to be very different for the current tax year, let HMRC know.

If you have problems filling in the form, consult the notes that come with it, but if you're still not clear, phone the tax credit helpline or consult an experienced adviser, for example, at a Citizens Advice Bureau. 

How tax credits work

If you're married, or living together as if you were married, or in a civil partnership, you have to make a joint claim for tax credits.

If you and your partner are both working and you both qualify for working tax credit, you can decide which one of you will get the payments.

If you're claiming child tax credit and you're in a couple, you need to decide which of you is the main carer, as that person will get the money into her or his account (or your joint account).

Renewing tax credits

If you get tax credits, you’ll be sent a renewal form each year between April and July. Beware of missing it - if you do, your payments cease and you'll be asked to repay all the money since April. The renewal pack is designed to check that you got the correct payments last year - underpayments or overpayments will mean you lose out, ultimately. An easy way to do this would be to use the government's new online renewal service here.

What to do with tax credit overpayments or shortfalls

Covering a shortfall

As HMRC provides an estimate of how much tax credit you're entitled to, it can need revising. This means the amount paid to you may be higher than it should be. If this is the case, HMRC will write to explain what you owe and how to repay it.

With luck you won't receive an ominous brown envelope this time round, but you could find one on your door mat next year. To prepare yourself for this possibility, consider the following:

  • Build up an emergency fund to cover the potential shock of needing to make repayments. Even a small amount, such as a few pounds a day, could make a huge difference over time.
  • Be prepared to speak to HMRC. You can call the tax credit helpline on 0345 300 3900. They will discuss your repayment options, which could include making deductions from future payments.
  • It's worth looking for ways to make savings, so you have a buffer in the event of a repayment or deductions from future payments.
  • You may want to review your family budget, looking for ways to cut back on spending that would help you build up some savings. A budget planner could help you identify exactly what you spend your money on.

Welcome surprises

The flip side of HMRC paying you too much in tax credits is the tax office not paying you enough. This is a distinct possibility as the amount you get each year is an estimate, based on your situation at the end of the previous tax year. If things change - which is a real possibility if you have become a parent and your income has dropped within the last tax year - you could be due more money. To get what you are due, inform HMRC as soon as there is a significant change in your circumstances.

If you receive a windfall from the tax office, here are some things you could do with the money:

  • Pay off your priority debts. These will be debts secured against your home, which you could lose if you fail to make repayments. Your mortgage is a typical secured loan.
  • If you have any money left over, clear your credit card bills, and cut up your cards if you think you'll only build up more debt quickly.
  • If you have cleared all debts, consider putting the money in a savings account, perhaps to pay towards Christmas, school costs (such as clothing and trips) or a holiday. The money you save could also cover emergencies, such as paying to fix your car after a failed MOT.
  • You could also open a Junior ISA for your child or children. You can put up to £4,080 in a Junior ISA this tax year, which is a great way to start building up a fund to pay for your child's future.

If you're perplexed about any aspect of tax credits, avail yourself of the 24/7, collective wisdom that is Mumsnet Talk.


Money Advice Service

Information on tax credit overpayments or shortfalls provided by the Money Advice Service.

All information accurate at time of publication.

Disclaimer: Any content in our money section is intended as general information only. For specific advice about your personal financial situation, get advice from qualified, regulated professionals.

Last updated: about 3 hours ago