Understanding how your entitlement to Working Tax Credit and Child Tax Credit is calculated isn’t overly easy. Luckily, the calculations are all done for you with the information you provide when you apply.

The best way to understand how is to understand why. So in this guide, we’ll try to give you some idea of the logic behind the system and some step-by-step examples.

You can be eligible for Child Tax Credit on its own (if you have children who are eligible for Child Benefit but you don’t work), or combined with Working Tax Credit (if you work 30+ hours per week). If you don’t have children, but you are over 25 and work 30+ hours per week, you may be eligible to claim Working Tax Credit. 

You can claim up until the child's 20th birthday as long as they are in full time education (higher education such as university doesn't count). Be sure to tell the tax office if the child is continuing in education as Child Tax Credit will usually stop after the 1st September following their 16th birthday.

Child Tax Credit and Working Tax Credit can usually only be backdated for a month. Child Benefit can usually be backdated for 3 months.

You can claim Child Tax Credit for your adopted or foster child if you’re not getting money from your local authority or Health and Social Services Board.

It’s not about being the biological parent of a child, it’s about being responsible for a child to the extent that they live with you and you pay for their meals. It’s not about who contributes the most financially; paying child maintenance won’t make you eligible to receive Child Tax Credit if the child lives elsewhere. If the child lives with you and somewhere else in reasonably equal shares you might find it difficult to decide who should receive the Child Tax Credit. In these cases, the Tax Credit Office can make the final decision for you.

What’s key is that you can claim for Child Tax Credit regardless of whether you work or not. You just need to be responsible for a child who is eligible (under the age of 16 or up to 20 if they’re in full time education or registered with the Careers Service) for Child Benefit.

We call them income guidelines because they are a good rule-of-thumb for the amount that you can get in tax credit in proportion to your income. (if you have a child, but you and your partner work less than 16 hours a week), working tax credit (if you’re over 25 and over 30+ hours a week) or working tax credit + child tax credit (if you have a child and you work 30+ hours a week). For instance, if you are single without children, £13,000 will generally be the upper limit to receiving tax credit.

Remember that these are not set-in-stone (hence why we are calling them guidelines). For some families the income limit will be far higher where certain circumstances mean that they are entitled to additional elements. This is why entitlements of Child Tax Credit and Working Tax Credit are separated into different ‘elements.’ These separate elements 'bolt together' to form your total entitlement, which is then reduced in proportion to your income to give you your actual entitlement. This means that elements can be easily factored in depending on a family's circumstances. Perhaps you, your partner, or your child suffer from a disability, or maybe you pay for childcare from an approved provider. The amount that you may receive increases because in this case you'll be entitled to more ‘elements’ (in this case, the disability and childcare elements) than a family with different circumstances. In other words, your income can be higher than the probable income limit and you'll still get tax credit.

The income threshold for Working Tax Credit is far lower, but the manner of calculating your entitlement is the same.

You and your partner have a child and your joint income is £19,000 per year. You also work for over 30 hours a week.
Before we work out the reductions, your entitlement would be as follows:

So, our total starting tax credits (before the deductions we are about to calculate) total is £7,895

At £19,000 (we calculate using the gross income – pre tax and National Insurance), your income is higher than the £6,420 limit. The reduction to your credit is calculated in the following way:

We’re going to work out 41% of the ‘excess’ income and then subtract that from our total starting tax credits.
Take £6,420 away from your income of £19,000
£19,000 - £6,420 = £12,580 (This figure is your excess)

Now we need to subtract 41% of the excess from the child element.
So, calculate 41% of £12,580
£12,580 divided by 100 and then multiplied by 41 = £5,157.80 (this is 41% of £12,580)

Subtract this figure away from your total tax credits of £7,895 (this was the combination of child tax credit and working tax credit -
So, £7,895 - £5,157.80 = £2,738

You can receive back up to 70% of your childcare costs if the care is provided from a registered or approved childcare, but you must be work over 16 hours a week as either a single person, or between a couple (i.e 8 hours each) to claim. Your household income typically needs to be below £32,200 to be eligible, but some households can still get payouts where there are many children, disabled children or either you or your partner has a disability.  The best thing to do is to check by ringing the tax credit helpline number on 0345 300 3900. You’ll be pleased to know that this 0345 number will be charged at a local rate, even if you call from your mobile.

The childcare element is kept as an element of Working Tax Credit as its purpose is to give an incentive to those who choose to work where the cost of child care would normally make it more affordable to stay at home. The money is paid to the recipient of the Child Tax Credit, who may or may not be the applicant for the childcare element of Working Tax Credit. This might seems a little odd, but it makes a lot more sense when you consider that it is a system that prioritises the financial needs of the child where the parents are separated or divorced.

The important thing to remember is that the childcare in question must be registered and approved; you cannot pay yourself for the care that you give a child, nor a friend or relative (unless they happen to work as an approved child minder). It does however mean that ‘childcare’ may still be claimed where the care in question is a summer school or camp, if it is approved and registered. 

The money is paid directly into the bank or building society account of the person responsible for the child in question. You can claim for up to 70% of your childcare costs. The maximum payout for a single child is £122.50 a week or £210 a week for two or more children.

£12,580 divided by 100 and then multiplied by 41 = £5,157.80 (this is 41% of £12,580)

At £9,000 (remember to use your gross income, i.e - pre tax and National Insurance), your income is higher than the £6,420 limit so the reduction to your entitlement is calculated thus:

Take £6,420 away from your income of £9,000
£9,000 - £6,420 = £2,580 (this figure is your excess)