Assessment of Income
Income for tax credit purposes is in principle assessed similarly to UK income tax. Thus 'income' (c/f 'taxable income') consists of what the individual receives from gross earned and unearned sources—less allowances for 'expenditures' that would reduce that income. But, unlike income tax, tax credits measure income based on family 'household', rather than the individuals within. Also the effect of income disregard —to mask large annual increases in resources from reassessment— weakens comparisons with a true income tax still further.
By comparison with other means tested benefits, the income treatment of claimants of tax credits is especially generous; it permits deduction of the full gross amount (rather than 50% net)of any individual pension contributions and any Gift aid payments. Since increases in income are subject to withdrawal at 39%(in the initial range), such reductions are effectively 'rebated' at the same rate through the tax credits received. Thus, while a pension (or Gift Aid) contribution of £100 will cost the employee £80 (after basic rate tax relief) directly from net pay, it attracts an additional £39 in tax credits; so the true cost is only £41.
Other concessions with regard to assessment of income (in contrast to means testing used elsewhere) include:
- disregarding the first £300 of 'other' gross income (rent, interest or dividends etc.).
- disregarding 'other' income derived from tax-free savings and investments
- having no explicit (ineligibility) limit for capital resources (as only actual income derived from capital is taken into account)
Read more about this topic: Working Tax Credit
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