Within the Australian, Canadian, United Kingdom, and United States tax systems, a tax credit is an item which is treated as a payment already made towards taxes owed. A similar concept exists under different names in the French tax system. It reduces tax liability unit-for-unit, in contrast to a tax deduction, tax allowance or tax relief which reduce taxable income.

Tax credits may be characterized as either refundable or non-refundable, or equivalently non-wastable or wastable. Refundable or non-wastable tax credits can reduce the tax owed below zero, and result in a net payment to the taxpayer beyond their own payments into the tax system, appearing to be a moderate form of negative income tax. Examples of refundable tax credits include the earned income tax credit and the additional child tax credit in the US, and the working tax credits or child tax credits in the UK.

A non-refundable or wastable tax credit cannot reduce the tax owed below zero, and hence cannot cause a taxpayer to receive a refund in excess of their payments into the tax system. Some examples of non-refundable tax credits are the Hope and Lifetime Learning educational tax credits in the US or the former children's tax credit in the UK. Another example would be declared gifts made to registered charities in the UK under the current Giftaid scheme, which attract tax relief (claimed by the charity) at the standard rate but which cannot reduce the donor's liabilty beyond the amount of tax actaully paid by them in a given year.

Tax credits and minimum wage

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Tax credits are like a means tested benefit paid direct to employees to encourage them into work. In the United Kingdom, employers do not pay for either the ‘child tax credit’ or ‘working tax credit’ but are expected, instead of paying the amounts due to the Inland Revenue, to give it directly to their employees. Single low earners working over 16 hours per week and couples working 30 hours combined are eligible. If one supports children, the supplements are greater. Two issues are being addressed, the so-called employment and poverty traps. That means the disincentive to work when expected wages are little more than unemployment benefits, and the difficulty for workers to break above a net earning margin faced with not just income tax, but national insurance, VAT, student loan repayments and other cumulative tax burdens.

This indirect wage regulation forms an important part of income for low earners and their families. It reduces the stigma of collecting benefits for workers and perhaps even shifts it to employers, who become very aware they are giving staff low pay. It is not a direct cost to employers in the way a National Minimum Wage is, but in some cases it has been found that employers put pressure on workers to do fewer hours to avoid extra tax forms. Some commentators have suggested that raising the personal allowance could achieve a similar effect for single workers with reduced administrative burden for both employers and the Inland Revenue.

See also

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• National Minimum Wage Act
• Wage Regulation
• Speenhamland
• Orphan drug
• Clinical trial

Taxation in the United States | Taxation in the United Kingdom | Taxation in Canada | Taxation in Australia