What are Tax Credits?
Tax credits are a type of government benefit designed to support low-income families and individuals. There are two main types of tax credits: Child Tax Credit and Working Tax Credit. Child Tax Credit is specifically for families with at least one dependent child, providing financial support to help with the costs of raising children. On the other hand, Working Tax Credit is aimed at individuals who work but have a low income, offering a boost to their earnings to ensure they have enough money to meet their needs.
Both types of tax credits are means-tested benefits, meaning the amount you receive depends on your income and family circumstances. The government assesses your financial situation to determine your eligibility and the level of support you’re entitled to. This ensures that the benefits are targeted at those who need them most, providing crucial support to families and individuals across the UK.
Worried about your savings affecting your tax credits?
Tax credits are a lifeline for many UK households. But did you know your household savings could affect how much you get? Many people miss out on money they’re entitled to because they don’t understand the savings rules.
Let’s clear things up. Whether you claim Working Tax Credit, Child Tax Credit, or both, the savings rules are the same and they’re simpler than you might think!
How much savings can I have while claiming tax credits?
The quick answer: you can have up to £16,000 in savings and still qualify for tax credits. If your savings are below £6,000, they won’t affect your tax credits at all. This is good news if you’re building a small emergency fund.
For savings between £6,000 and £16,000, HMRC reduces your tax credits. They add £1 to your weekly income for every £250 (or part of £250) you have above £6,000. Once your savings hit £16,000, you can’t claim tax credits anymore.
Make sure to report any changes in your savings by the specified date to avoid any issues with your tax credits.
This limit applies to your household’s combined savings if you’re making a joint claim. These rules apply to both Working Tax Credit and Child Tax Credit – there’s no difference between them.
What counts as savings for tax credit calculations?
HMRC looks at your total capital, not just what’s in your bank account. This includes money in bank accounts, investments and shares, and Premium Bonds. Property you own (but not your main home) and ISAs also count towards your total.
Your pension savings are generally not counted, which is a relief for many people. HMRC checks your savings when you first claim and at renewal time.
For example, if you have £7,000 in savings, HMRC will add £4 to your weekly income calculation.
If your savings change significantly during the year, you need to tell them. I once forgot to report a small inheritance and had to repay some tax credits later – a lesson learned the hard way!
Are any types of savings exempt from tax credit calculations?
Yes! Several types of savings don't count toward your limit:
Your main home
Personal possessions like jewellery, furniture and cars
Business assets if you're self-employed
Compensation payments for personal injury
Money in certain trust arrangements
Funds set aside specifically for essential home repairs
This means you could have valuable possessions without affecting your tax credits. Many claimants find this reassuring when worried about their eligibility.
What happens if my savings go over the threshold?
If your savings exceed £16,000, you’ll lose eligibility for tax credits completely. You must tell HMRC about changes to your savings within one month. If you don’t, you might have to pay back any overpayments later. If your savings increase significantly, you must inform HMRC to avoid any overpayments.
The good news is that if your savings drop below £16,000 again, you can reapply for tax credits. Be careful about hovering near the threshold, though. Fluctuating above and below £16,000 can cause payment disruptions and paperwork headaches.
How can I manage my savings while keeping my tax credits?
If you're close to the thresholds, consider planning major purchases around your tax credit assessment periods. This might help keep your savings below key thresholds. If you're in a couple, you might spread savings between both partners.
Keep clear records of what your savings are for, especially if some might be exempt. Never transfer assets just to claim benefits – HMRC has "deliberate deprivation" rules to prevent this.
Other Benefits You Might Be Entitled To
In addition to tax credits, you may be entitled to other benefits depending on your situation. These can include:
Universal Credit: A benefit for people of working age who are on a low income or out of work. It combines several benefits into one monthly payment, simplifying the support system.
Pension Credit: A benefit for people over State Pension age who are on a low income. It provides extra money to help with living costs and can also help with housing costs.
New Style Jobseeker’s Allowance: A benefit for people who are unemployed and actively seeking work. It’s based on your National Insurance contributions and can be claimed alongside Universal Credit.
Carer’s Allowance: A benefit for people who care for a disabled person for at least 35 hours a week. It provides financial support to those who dedicate their time to caring for others.
Disability Benefits: Benefits for people who have a disability or illness that affects their daily life. This includes Personal Independence Payment (PIP) and Disability Living Allowance (DLA).
State Pension: A benefit for people who have reached State Pension age and have paid enough National Insurance contributions. It provides a regular income to support you in retirement.
These benefits are designed to provide additional support based on your specific circumstances, ensuring you have access to the financial help you need.
Making the most of your tax situation
Understanding savings limits is just one part of managing your tax affairs effectively. Tax credits provide crucial support for millions of UK households. Knowing the rules helps you get everything you’re entitled to.
Using benefits calculators like Policy in Practice can help you understand your entitlements better.
For personal tax matters beyond credits, Pie is the UK’s first personal tax app designed specifically for working individuals. It simplifies self-assessment with integrated bookkeeping, real-time tax figures, and expert advice when you need it.
Getting Help and Advice
If you’re unsure about what benefits you’re entitled to or need help with your claim, there are several options available:
- Contact HMRC: You can contact HMRC directly for advice on tax credits and other benefits. They can provide detailed information and help you understand your entitlements.
- Benefits Advisers: You can find a local benefits adviser through the GOV.UK website or by contacting your local council. These advisers can offer personalised advice and support with your claims.
- Charity Organisations: Some charities, such as Citisens Advice, offer free benefits advice and support. They can help you navigate the benefits system and ensure you’re receiving all the support you’re entitled to.
- Online Resources: There are many online resources available that can help you check what benefits you’re entitled to and provide guidance on the claims process. Websites like Turn2us and Entitledto offer benefits calculators and detailed information.
Remember to always seek advice from a trusted source and be cautious of scams or misinformation. Getting the right support can make a significant difference in managing your finances and ensuring you receive the benefits you’re entitled to.
