Tax Credits: The four steps
The Income Regulations prescribe a series of four steps to work out income for tax credits purposes. The claim itself does not require this calculation to be submitted, but we have set out the steps below in order to give a complete picture of the legislative method.
NOTE: This section of the site explains what is income for tax credit claims. Where a claimant has their tax credits terminated in-year because they are moving to universal credit, or they claim UC in the same tax year that a tax credit claim has ended, there are different rules on how to calculate income. Please see our universal credit section for more information.
For joint claims, the joint income for the relevant tax year of both partners (or of all members of a polygamous unit) should be used, as in the example below. Only the income of the partners in the couple, or members of the polygamous unit, is aggregated; any income belonging to any children in the household is left out of account, except in certain circumstances where a claimant artificially transfers income to a child in an attempt to maximise their tax credits entitlement.
Step 1. Add together:
If the total is £300 or less, it is ignored completely. Otherwise, £300 is deducted from the total. There is no notional capital rule as for social security benefits - only the actual income from savings is counted.
Step 2. Add together:
Step 3. Add together the amounts in Step 1 and Step 2.
Step 4. Add trading income to - or if there is a loss subtract the trading loss from - the total in Step 3.
Then deduct:
- bank conversion charges or commission where income paid in another currency is converted into sterling;
- the grossed-up amount of any gift aid, payroll giving or give as you earn donations made in the current year; the gross amount of any contributions to a registered pension scheme. Where the pension scheme uses a net pay arrangement, contributions are paid out of salary or wages and already taken into account on the P60 for tax credit purposes, so in those cases, the pension contribution should not be deducted from the P60 income figure separately, as that would create an incorrect double-deduction. See our Calculating Tax Credits Income section for more information. This can cause some confusion when considered in the context of allowable deductions from net pay for other social security benefits, including Universal Credit.
If a claimant has sustained a loss in a UK or overseas property business (‘property loss’) it can be set against total income for tax credits purposes.
Unlike mainstream tax, income for tax credits includes all worldwide income, whether or not it is remitted to the UK or is exempt under the terms of a double taxation treaty. ‘Unremittable’ income is an exception to this rule (explained below).
Where a claimant would be chargeable to income tax but for some special exemption or immunity from income tax, tax credits income must be calculated on the basis of the amount which would be so chargeable but for that exemption or immunity. In other words, income must be taken into account for tax credits even if it is exempt from tax, unless it is specifically disregarded under the Income Regulations.
Income paid in a foreign currency must be converted into sterling using an average of exchange rates in the 12 months up to 31 March in the tax year in which the income arises. HMRC publish the exchange rates at on the GOV.UK website.
HMRC publish a working sheet (TC825) to help claimants working out their income for tax credit purposes.
Last reviewed/updated 13 June 2024