Tax Credits
March 7, 2009
The mere mention of the term ‘tax’ can induce sleep in many. This is quite contradicting to the reaction one would get when the word ‘money’ is mentioned. In spite of its rooted relationship, tax and money are viewed through two different lenses. Knowing where your money goes and how the government is handling your money is however very important to every tax payer.
The term tax credit describes two different concepts. The first is the recognition of partial payment already made towards taxes due and the second is a state benefit paid to workers through the tax system, which has the effect of increasing tax income. The amount of tax credits one gets depends on the number of children one has, one’s occupation and the number of working hours. It also depends on other factors such as whether the taxpayer is paying for childcare, whether he or she or their child has a disability and also on whether the tax payer is aged above fifty and coming off benefits. The payments also depend on your income. The lower your income, the more tax credit you can get.
Tax credits may be characterized as either refundable or non-refundable, or equivalently non-wastable or wastable. Refundable or non-wastable tax credits can reduce the tax owed below zero, and result in a net payment to the taxpayer beyond their own payments into the tax system. Examples of refundable tax credits include the earned income tax credit and the additional child tax credit in the U.S. A non-refundable or wastable tax credit cannot reduce the tax owed below zero, and hence cannot cause a taxpayer to receive a refund in excess of their payments into the tax system. Some examples of non-refundable tax credits are declared gifts made to registered charities.
Tax credits are like a means tested benefit paid direct to employees to encourage them into work. A minimum level of child tax credits is paid to all individuals or couples with children. The amount paid is increased if either parent works for at least 16 hours a week. Working tax credit is paid to single low earners without children who are aged 25 or over and are working over 30 hours per week and also to couples without children, at least one of whom is over 25, provided they are working for 30 hours a week combined and at least one of them is working for 16 hours a week. In the case of people who are married or living with a partner they will need to make a joint claim for tax credits whereas an unmarried individual can only make a single claim. The tax credits are paid directly into the bank, building society, Post Office or National Savings account if it accepts Direct Payment on either weekly basis or every four weeks.
The main schemes of tax credit includes, working families’ tax credit, children’s tax credit and disabled persons’ tax credit. Working families’ tax credit is given to families with dependent children on low-to-middle incomes. To qualify, one parent has to work 16 or more hours a week and each household must have less than £8,000 in savings. Couples can also get help with child care.
The tax credits payments one receives from the government are based on the individuals’ current personal circumstances and his or her income from that that particular year. Tax credit is generally more valuable than a tax deduction of the same magnitude because a tax credit reduces tax directly, while a deduction or allowance only reduces taxable income and so the reduction in tax is only a fraction of the deduction or allowance.
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