You’ve probably heard of tax credits, but the vast majority of people actually don’t know what they are. Tax credits are financial incentives offered by the government to reduce the tax liability of individuals or businesses. They are designed to help those who are struggling financially, including families on low incomes. Tax credits work by reducing the amount of tax owed or by providing a refund to taxpayers who have overpaid.
They can make a significant difference to the financial well-being of families, providing much-needed support to cover essential expenses like housing and childcare. HM Revenue & Customs (HMRC) deals with claims for tax credits. HMRC have recently announced they will issue 1.5 million annual renewal packs for the 2023/2024 tax year to customers. This will be between 2nd May and 15th June 2023.
We explain exactly what tax credits are, who is entitled to them, and how they’re being replaced in 2024…
What Are Tax Credits?
There are two types of tax credits; child tax credit and working tax credit. You can claim one or both of them, depending on your household circumstances.
Working tax credit (or WTC) is paid to people who work and are on a low income. It does not matter whether you are an employee or self-employed. You do not need to have children to get WTC. The income threshold for WTC for the 2023/24 tax year stands at £7455, whilst the withdrawal threshold rate is 41%.
Child tax credit (or CTC) is paid to people who have children. It is paid in addition to child benefit and you do not have to be working to get it. For those entitled to CTC only, the threshold for the 2023/24 tax year is £18,725.
Tax credits are considered a benefit, however unlike other social security benefits, they are calculated as an annual amount. They are paid in weekly or monthly instalments during the tax year. Whilst most benefits are handled by the Department for Work & Pensions, HMRC deal with them. Tax credit amounts are calculated using a number of factors. These include you and your partner’s total taxable income; whether you, your partner, or your children have a disability or long-term health problem; the number of hours you work; and the amount you pay for childcare.
Who Is Entitled To Tax Credits?
To be eligible, you must meet certain criteria. For working tax credits, you work a certain number of hours per week and earn less than a certain amount. The number of hours required to work depends on age, whether you have children, and whether you have a disability.
For child tax credits, you must have responsibility for a child under 16, or under 20 if in full-time education. You must also meet certain income criteria, although this can vary depending on your individual circumstances.
What Is Happening To Tax Credits?
As stated, HMRC are issuing 1.5 million renewal packs between 2nd May 2023 – 15th June 2023. Once customers receive their annual renewal pack they will have until 31 July 2023 to check the information is correct. They must then notify HMRC of any changes to their circumstances which may affect their claim.
There are two types of renewal packs:
- if it has a red line across the first page and says ‘reply now’, customers will need to confirm their circumstances to renew their credits.
- if it has a black line across the first page and says ‘check now’, customers will need to check that their details are correct. If they are, they do not need to do anything and their credits will be automatically renewed.
More than 500,000 customers will need to reply to HMRC by the deadline to confirm their circumstances for the 2023 to 2024 tax year, or risk having their payments stopped. Customers can log into GOV.UK to check the progress of their renewal, be reassured that it is being processed and know when they will hear back from HMRC. Customers choosing to use the HMRC app can renew their tax credits, update changes to their claim, check their tax credits payments schedule, and find out how much they have earned for the year.
By the end of 2024, tax credits will be replaced by Universal Credit. Customers who receive tax credits will receive a letter from the Department for Work and Pensions (DWP) telling them when to claim Universal Credit. It is important that customers claim by the deadline shown in the letter to continue receiving financial support as their tax credits will end even if they decide not to claim Universal Credit. However, there is no need to wait for their transfer letter, and customers can apply to move to Universal Credit sooner, if it is right for them.
We hope this has outlined to you what tax credits are and how they’re changing. If you’d like to know any further information on anything mentioned, or anything accounting related for that matter, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy talking you through your query.