Computing income for tax credits purposes

Produced by Tolley

The following Personal Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Computing income for tax credits purposes
  • Migration of tax credits to universal credit
  • Calculation of household income for tax credits
  • Pension income for tax credits
  • Investment income for tax credits
  • Property income for tax credits
  • Foreign income for tax credits
  • Employment income for tax credits
  • Social security income for tax credits
  • Student income for tax credits
  • More...

Computing income for tax credits purposes

Migration of tax credits to universal credit

New claims for tax credits are no longer possible as they have been replaced by the universal credit for all claimants. Existing claimants will continue to receive tax credits until they are migrated to the universal credit system. Migration will take place when a change in circumstances is reported.

See the Universal credit guidance note.

Calculation of household income for tax credits

Household income for tax credits purposes is very similar to the taxable income of the claimant or the claimant couple. However, there are some key differences from the normal tax rules in both income and deductions.

The statutory income definition is divided into four steps which you will need to work through in order. The income that is taken into account for both a single claim and a joint claim is the total income for the tax year irrespective of whether the claim is for an entire tax year. Where a claim relates to a part year, the income is calculated pro rata when the taper is computed. See the Computing the working tax credit and Computing child tax credit guidance notes for a discussion of how the maximum entitlement is tapered.

Step 1 ― calculate and then add together:

  1. pension income (see below)

  2. investment income (see below)

  3. property income (see below)

  4. foreign income (see below)

  5. notional income (see the Notional income and anti-avoidance for tax credits guidance note)

If the result of Step 1 is £300 or less, it is ignored for tax credits purposes.

If this is more than £300, only the excess over this amount is included. Note that the £300 limit is per claim unit, so is deducted only once from the income of a couple where a joint claim is made. Where a couple separates during a claim year, the treatment of this deduction is more complex as it needs to be apportioned between the various claims the parties are eligible to

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