How Do Working Tax Credits Work?

[David H]

Despite some research the complex formulas on various sites only served to muddy the waters further how working tax credits operate. In my day you had a personal allowance and everything you earned above it was liable to a percentage of income tax.

Assuming that has not changed, then why take it away and then give some of it back, what is the method this can be operated rather than simply raise the personal allowance as they do usually?

[fiction-factory]

Oddly the personal allowance has increased significantly in recent years from £6035 in 2008/9 to £10600 in 2014/15, so I'm not sure many of those on tax credits are paying a lot of it back in tax. One problem though is that NI thresholds have not increased at the same rate, and pay rates have tended to use the minimum wage as the industry norm in some sectors. But also many people have adapted their working patterns around tax credits, making sure they don't work beyond thepoint where they would start to lose tax credits, and some have adapted their lifestyle so it now covers things that were luxuries 5 years ago.
I agree that in an ideal world there should be no need for tax credits- the minimum wage and tax/NI allowances should be sufficient. The added complexity of tax credits also means many people don't claim . I just hope they are phased out/cut back in a less drastic way as at present many will lose money that they won't get back until a year later

[David H]

My question is I don't understand the formula. If people are eligible to pay tax why and how is it returned if they earned more than the limit? I don't get it at all. Is it a scam of some sort?

[themas]

No it is not a scam. It is an incredibly expensive system (costs £30 billion pa) introduced – along with Child Tax Credit - by Gordon Brown in 2003. Effectively Government income (a great deal of which comes from income tax) is used to make payments to people who satisfy the means tested conditions of entitlement to the credit. It would be clearer (&, I think, more honest) to call it an in work means tested benefit rather than credit.