Income for tax credits

Overview

People can have income from various different sources. Tax credits used gross income information, that is, before deductions for tax and national insurance are taken off. Generally, tax credits take account of income that is taxable, but there are some exceptions. There are fixed rules about what counts as income for tax credits and how income is calculated. In a joint claim, the income of both claimants is taken into account.

  The rules on what counts as income can be quite complex, so its important to check the information on GOV.UK or contact HMRC.

The four steps

The legislation sets out a series of four initial steps to work out tax credit income. The steps are:

Step one, add together:

• pension income
• investment income
• property income
• foreign income
• notional income

If the total of these is £300 or less, ignore it. If it is more than £300, subtract the first £300. Note that there is no notional capital rule as for social security benefits – only the income from savings is counted. However, it is important to be clear whether something is capital or income, for example some lump sum payments, such as pension lump sums, are treated as pension income and the taxable amount should be declared for tax credits as pension income.

Step two, add together

• employment income
• social security income
• student income
• miscellaneous income

Step three, add together the totals from step one and step two

Step four, add trading income to – or if there is a trading loss subtract trading loss from – the total from Step three.

From the total from step four, deduct:

• bank conversion charges or commission
• gross gift aid, payroll giving or give as you earn donations made in current year
• gross pension contributions (note: where a pension scheme uses a net pay arrangement, contributions paid out of salary are already taken into account in the P60 taxable income figure, so should not be deducted again).

There is more detailed information about each category of income on our website for advisers.

Annual income

Tax credits are worked out using yearly rates, so you need to provide an annual income figure. HM Revenue & Customs (HMRC) use the tax year as the basis for their calculations so any annual income figures you have to provide should, therefore, be the same, that is from 6 April one year to 5 April the next year.

Even if your tax credit claim ends part way through the year, or starts part way through the year, HMRC still need you to provide your annual household income for the tax year. The only exception to this is where you have claimed universal credit in the same tax year and so in-year finalisation rules apply.

Finding the annual income figure

If you are an employee, the end of tax year statement you get from your employer (a P60) should give the information needed about employment income for tax credits. The figure required is the normally the gross income amount, before tax and national insurance are taken off.

If you get benefits from the Department for Work and Pensions (DWP), you should get a statement of taxable benefits at the end of the tax year.

If you are self-employed, you should normally use the business profits (or loss) figure from your self-assessment tax return. (Note: special rules apply to the way the business profits (or loss) figure is worked out for tax credits for anyone covered by the basis period reform rules so that any amount of transition profits for the tax year 2023/24 under basis period reform are disregarded for tax credits).

Specific types of income

There are many different sources of income – too many to mention each individually. It is important that you check whether your particular income counts as income for tax credit purposes. Below we have included some information on certain types of income that generate the most questions to our website:

Maintenance payments

Any maintenance payments received, whether for a child or claimant, are ignored for tax credits.

Statutory payments whilst off work

Statutory sick pay is counted in full as earnings.

Statutory maternity, paternity, parental bereavement, shared parental leave and adoption pay is also counted as earnings, but only the amount over £100 a week is taken into account.

Payments for fostering or looking after children

Qualifying care receipts paid by local authorities and similar agencies are only taken into account in working out income for tax credits to the extent that they are taxable. Therefore, if you use the simplified method for working out profits for income tax self assessment, your income from caring for tax credits purposes will be the amount on which you pay income tax. Where care receipts are wholly covered by the tax-exempt amounts, then none of your income from caring is counted in assessing the tax credits award.

Also, if you use the standard method, income from caring for tax credits will be the same as the taxable profits after deductions. There is more information about taxable income for foster carers and shared lives carers in our working section.

Income from benefits

Most but not all taxable state benefits should be included as social security income for tax credits. However, income-based jobseekers allowance although taxable is not counted as income for tax credit purposes. Carers allowance supplement – available to those living in Scotland only – is also taxable but is not counted as income for tax credit purposes. Not all benefits are taxable; see our page on state benefits page for more information.

In this context – taxable benefits means benefits that are liable to tax, it does not matter whether you as an individual actually pay tax on them or not.

Cost of living payments

The UK government cost of living payments are ignored for tax credits.

Compensation payments relating in the Horizon System

Payments made by the Post Office or Secretary of State in connection with compensation connected to the failings of the Horizon System and corresponding court judgements are disregarded as income for tax credit purposes. 

Deferred state pension

The amount of state pension that you defer should not be included as income for tax credits while it is being deferred. State pension is only included as income for tax credits when you actually claim it. Note though, that the rules about deferred state pension are different for universal credit , pension credit and other means tested benefits and it is important to seek welfare rights advice if claiming any other benefits.

If you reached your state pension age before 6 April 2016 and deferred receiving your state pension for at least 12 months in a row, you can choose to receive a one-off lump sum payment in addition to your regular state pension when you decide to stop deferring. This lump sum will also count as pension income for tax credits purposes in the year in which it is taxable.

There is more about state pension deferral in our pensions section.

Property income

From 6 April 2017, there were changes to how property income is calculated for tax purposes for residential landlords. The change basically means that there will be a restriction on how much you can deduct as expenses for finance costs including mortgage interest. These tax changes were introduced gradually and since 2020 no expense deduction has been allowed for finance costs and instead it is necessary to claim a tax relief instead. See GOV.UK for more information.

However, for tax credits, you will need to continue to calculate property income as before 6 April 2017. This means that you can deduct finance costs as an expense when working out your profit for tax credit purposes only. While this is better for tax credit claimants, it does mean that you will need to work out a figure for tax credits that is different to the figure needed for your tax return as your taxable property income.

Foreign income

The remittance basis does not exist for tax credits, so effectively the arising basis is imposed, regardless of what basis of taxation is adopted.

This means that even if you use the remittance basis for tax purposes – whereby foreign income and gains are only taxed in the UK when they are brought to, or 'remitted to' the UK – you must declare your worldwide income for the purposes of tax credits.

Foreign income (excluding employment income and trading income) is part of the group of ‘other income’ types of income for tax credits. It should be entered under the ‘other income’ box on the claim form and renewal forms. This includes profits from property overseas, overseas pension and social security income, and overseas investment income, such as bank interest arising on a non-UK bank account. Foreign chargeable event gains are treated as investment income for tax credits, which, again, should be included in the ‘other income’ box.

Employment income and trading income arising outside the UK are simply treated as employment income and trading income respectively, so they should be entered in these boxes on the forms rather than the ‘other income’ box.

The amount of foreign income should normally be the gross amount (before any tax is taken off) and the amount should be stated in pounds sterling (GBP), not the original currency. The amount of any banking charge or commission paid when converting the currency can be deducted from the gross figure.

Note that, from 6 April 2017, it is important to report 100% of any overseas pension received as the 10% deduction is no longer available.

When converting foreign income into pounds sterling, the average exchange rate figure for the year the income relates to should be used. For example, if the income is from 2023/24, use the average exchange rate for the year ended 31 March 2024. The exchange rates are on the GOV.UK website.

Anyone with foreign income should seek advice to ensure that they are declaring the correct amounts. For those who require more detailed information about foreign income and tax credits, the HMRC manual provides full details of what counts as foreign income.

There is more information about the remittance basis and arising basis in our international section.

Coronavirus grants and payments

Numerous different grants and payments were paid out by UK government, devolved governments (in Scotland, Wales and Northern Ireland) and Local Authorities in response to the Coronavirus pandemic. Some of these payments count as income for tax credits, some are disregarded.

We have published detailed guidance on the tax and national insurance position of these payments.

  If you have received any coronavirus related payments you must check – for each different payment:

• Whether the payment counts as income for tax credit purposes or can be disregarded
• If it does count as income, how it should be declared for tax credit purposes on your form. Some of these payments may already be included in your P60 income figure so you must check carefully.

Although tax credit rules usually follow the tax rules, so if a payment is taxable then it is likely to be income for tax credit purposes, there are exceptions to this rule and so you should not assume that if it is taxable it counts as income for tax credit purposes.

Our current understanding is that the following grants count as income for tax credit purposes:

Self-employment Income Support Grant (SEISS)

We have published some detailed guidance on how to declare SEISS grants on the tax return. For self-employed individuals the first 3 SEISS grants are taxable in the 2020/21 tax year, no matter what accounting period is used. This means they count as income for tax credits in the 2020/21 tax year. Grants 4 and 5 are taxed in the tax year they are received, which should be 2021/22 tax year and therefore count as income for tax credits in 2021/22 tax year.

There are special rules on how the grants are taxed and how to declare SEISS grants on the tax return for an individual partner in a partnership – depending on whether the grant was paid into the partnership and treated as partnership income or whether it was received as an individual partner.

For tax credits, it is important to be careful not to double count SEISS grants. As explained in our article on where to put the grant on your tax return, it will be included in the taxable profit figure. Usually for tax credits, claimants take the figure from a certain box on the tax return – depending on which return is filled in (although there are some different rules if using averaging as a farmer or creative artist):

• If you are an individual and complete the self-employment (short) pages – you will usually declare the figure in box 28 + any figure in box 30 as your self-employed income for tax credits. If you have correctly declared your SEISS grant on your tax return, it will already be included in the box 28 figure.
• If you are an individual and complete the self-employment (full) pages – you will usually use the figure in box 73 plus any figure in box 75 for tax credit purposes. If you have correctly declared your SEISS grant on your tax return, it should already be included in the box 73 figure.
• If you are in a partnership and you received the grant as an individual partner then you will usually use the figure in box 16 of the partnership supplementary pages (both short and full) + any figure in box 19 as your self-employed income for tax credits. If you have correctly declared your SEISS grant on your tax return, it will already be included in the box 16 figure.
• If you are in a partnership and the SEISS grant was paid to the partnership and distributed to partners based on the partnership agreement, then the SEISS grant will be declared as part of the partnership’s turnover on the partnership return. This will mean your share of it will be taken across to your own partnership tax return supplementary pages as taxable income. You will usually use the figure in box 16 of the partnership return (both short and full) + any figure in box 19 as your self-employed income for tax credits. If you have correctly declared your SEISS grant on your tax return, it will already be included in the box 16 figure.

  The above covers most situations, although there may be a few instances not covered by this general information, for example if you received a SEISS grant in 2022/23 and need to include it in your 2022/23 tax return. But in all cases, if you get tax credits, you need to make sure the SEISS grant is included in your income figure that you declare for tax credits.

If using the trading allowance, it cannot be used against SEISS grant income for tax purposes (or tax credit purposes) – see our guidance for more information.

If you need to repay part or all of a SEISS grant you have received it can affect your tax credit award. See our guidance for more information.

Small business grants, hospitality and leisure grants

These grants were paid by local authorities.

If you are self-employed, then the payments form part of your taxable trading income on your tax return following normal accounting rules. If you have reported the grants correctly on your tax return (usually box 10 on the self-employment (short) pages and box 16 on the self-employment (full) pages), then you should use the boxes detailed above for SEISS, as that will ensure the grants flow through as income into the correct year for tax credits.

Coronavirus job retention scheme

If you are self-employed and received payments from the job retention scheme to help with your employee’s wages, then these payments form part of your taxable trading income on your tax return following normal accounting rules. If you have reported the grants correctly on your tax return, (usually box 10 on the self-employment (short) pages and box 16 on the self-employment (full) pages) then you should use the boxes detailed above for SEISS, as that will ensure the grants flow through as income into the correct year for tax credits.

  If you are an employee who was furloughed under the job retention scheme, you needed to declare your employed income from your P60 in the usual way. Payments under the job retention scheme were made to employers, for them to use those payments for wages/salary expenditure for their employees. So, employees did not directly receive job retention scheme payments themselves but instead they received partial or full wage/salary payments from their employer. The fact that your employer might have received payments under the job retention scheme doesn't affect your tax position as an employee and doesn't affect your income for tax credits.

Also, if you are an individual who received a JRS grant to pay an employee – for example a nanny then you do not need to declare this grant for tax credits as it is not taxable.

Bonus payment to health and social care staff

The following payments were made to certain health and social care staff:

• Scottish £500 payment for health and social care staff
• Wales – £735 payment for social care workers and an earlier £500 payment for care home and domiciliary workers
• Northern Ireland – HSC staff recognition payment

Our understanding is that these payments were made through the payroll and are therefore subject to tax and NI. They also count as income for tax credits. However, you must be careful not to double-count them. They will already be included in your P60 figure and if HMRC have used data from the tax system to show your income on your renewal notice, the bonus should already be included.

Enhanced statutory sick pay scheme – Wales only

This scheme was only available in Wales. Our understanding is the enhanced sick pay payments were made through the payroll and are therefore subject to tax and NI because they are treated as any other earnings. They also count as income for tax credits. However, you must be careful not to double-count them. They will already be included in your P60 figure and if HMRC have used data from the tax system to show your income on your renewal notice, the bonus should already be included.

Other coronavirus support payments

We have listed below the coronavirus payments that are disregarded as income for tax credit purposes in the legislation.

However, there are likely hundreds of different coronavirus related payments. If not specifically excluded, the payments may count as miscellaneous income for tax credit purposes unless they were received as part of your self-employed trade in which case they may count trading income. You should carefully check any other payments with HMRC.

The following coronavirus related payments are not counted as income for tax credit purposes:

• Payments, in cash or vouchers, in lieu of free school meals.
• Payments in connection with emergency volunteering leave under the Coronavirus Act 2020.
• Any payment made under the NHS Test and Trace Self-Isolation Payment Scheme established on 1 September 2020, or the Test and Trace Support Payment Scheme established on 28th September 2020 in England. Payments from schemes in other parts of the UK for the purpose of providing financial support to people who are required to self-isolate due to coronavirus and cannot work from home are also disregarded as income. However, these payments are taxable, but not subject to national insurance. If you are self-employed, you may need to deduct the amount of any test and trace payments from your taxable profit figure before declaring it for tax credit purposes. This is because test and trace payments are taxed as income of your business but they are not counted as income for tax credit purposes.
• Any payment made under the Covid Winter Grant Scheme (England) or the COVID local support grant (in respect of England) or any other corresponding scheme in Northern Ireland, Scotland or Wales for the purpose of providing financial support to families and vulnerable individuals to assist with the cost of food and utilities over the same period. The Covid Winter Grant scheme should not be confused with some winter business grants that were paid by some local authorities.
• The £500 payment made to certain working households in receipt of tax credits.
• Payments made under the NHS and Social Care Coronavirus Life Assurance Scheme are not counted as income, instead they are capital (and so only any interest will potentially count as income for tax credits).

HMRC have published some information on the GOV.UK website. Please note, however, this information appears to only list some payments that should be taken into account but it does not explain how to take the payments into account. Anyone unsure about where to include a payment in their income figure for tax credits, we recommend contacting HMRC directly to check with them.

In-year finalisation

If you have claimed tax credits and then claim universal credit in the same tax year or, from 6 April 2024, if you have your migration notice but don’t make your universal credit claim on or before the deadline, your tax credits award will stop and HMRC will finalise your award in-year (that is, before the end of the tax year). In this situation, HMRC will write to you to explain what you need to do. It is important to note that the income figures provided here will be for the shortened award period and not for the full tax year. There is more about this in our in-year finalisation section.