By Lee Healey, IncomeMAX Managing Director

Saturday 22nd January 2011

Entitlement experts IncomeMAX have discovered that some higher earning parents may still be entitled to tax credits from April 2011, even though the second earnings threshold has been reduced to £40,000.

The second tax credit threshold reduction, announced in the emergency budget, has been widely publicised and many higher earning parents believe they will no longer be entitled to tax credits from April if their income exceeds £40,000 per year.

But what many parents fail to realise is that circumstances such as having higher child care costs, a higher number of children or a disabled child can mean that Tax Credits will still be payable, even if income exceeds the second income threshold of £40,000.

The website recently contacted IncomeMAX to say that a number of parents have asked them for clarification on the rules, with one parent stating that it is too confusing and virtually impossible to understand what the threshold levels actually mean. This is a regular complaint about the benefits and tax credits system and it would appear that the Coalition Government's much publicised changes to the system have done little to help the general public make more sense of it all.

Tax Credits, made up of Child Tax Credit and Working Tax Credit, have a history of causing confusion. In 2004, over 80,000 people were hit with tax credit overpayments and as a result, the Government had to increase the income disregard from £2500 to an eye watering £25,000. Interestingly, the tax credits income disregard is set to drop to £10,000 in April, heralding a possible return to the bad old days of tax credit overpayments.

The main point of confusion for most people is the calculation of tax credit awards, which adds up the maximum amount of tax credits available, before tapering them away by using a claimant’s income, various threshold levels and a set taper rate.

What do parents need to be aware of?

* Lone parents or couples with taxable income below £40,000 per year will be eligible for AT LEAST the £545 family element of Child Tax Credit for the tax year 2011/2012.

* Some lone parents or couples with taxable income over £40,000 may still be eligible for tax credits, especially if they have:

- a higher number of children

- a disabled child

- higher child care costs

IncomeMAX Managing Director Lee Healey urged parents to seek advice. “It is so important to claim your tax credits if you think you might be eligible and don’t be afraid to speak to an independent expert if you are confused about your tax credit entitlement” said Lee.

HMRC have confirmed the findings, telling IncomeMAX that “households with children will, in general, receive tax credits up to an income of around £42,000, though families with disabled children, higher childcare costs or large numbers of children may be able to receive tax credits with incomes above this threshold”.

HMRC also advised that if someone thinks they may be eligible for tax credits then they can either check it out online using the HMRC online calculator or via the tax credits helpline on 0845 300 3900.

2011/2012 Tax Credits Case Study

John and Sarah are both aged 32. They have two children, George, aged 2 and Ronnie aged 3. John works 35 hours per week and Sarah works part time for 15 hours per week.

Their joint, yearly taxable income to be used for calculating tax credits in 2011/2012 is £45,000 and they have average Child Care Costs of £240 per week.

John and Sarah’s Maximum Tax Credits Amount

CTC Family Element £545

CTC Child Element    £2555

CTC Child Element    £2555

WTC Basic Element   £1920

WTC Couple Element £1950

WTC 30 Hour Element £790

WTC Childcare Element £8736 (70% of £240 x 52)

Maximum Tax Credits = £19,051

John and Sarah’s Income

= £45,000

Tax Credit Threshold

£6420 *

Tax Credits Final Calculation

£45,000 - £6420 = £38,580

Taper = 41% of £38,580 = £15,817.80

Maximum Tax Credits £19,051 minus taper of £15,817.80

TAX CREDIT AWARD = £3233.20 (made up entirely of Child Tax Credit as Working Tax Credit elements taper away first)

* Note that the £40,000 second threshold will not apply, as the award of Child Tax Credit includes an amount higher than the £545 family element