Tax Credits: Other changes

Some changes of circumstances must be notified to HMRC within a specific time period. If this is not done, as well as an overpayment, claimants may be faced with a penalty for failure to notify the change. These changes are set out in the changes that must be reported section.

Other changes leave claimants with a choice about whether or not to inform HMRC when they happen or wait until the end of the year.

Other changes

It is advisable to report other changes which increase entitlement within one month in order to secure the higher credits, as increases in awards can only be backdated by up to one month in most cases. The backdating period for changes of circumstances was reduced from three months to one month from 6 April 2012. (The only exception to this is for the disability element where in certain circumstances longer backdating can be given).There would be no other penalty if the change was notified more than one month later - there would just be the loss of credits that might have been due for the period before the one-month backdating time limit.

Changes of circumstances which decrease entitlement are backdated to the date of change and will often result in an overpayment of tax credits.

Income changes

There is no legal obligation to report changes in income when they happen, although they must be reported accurately on the annual declaration which is sent to claimants after the end of the tax year.

Deciding when to report changes of income (either when the change happens or after the end of the tax year) can have consequences not only for tax credits, but also for other benefits such as Housing Benefit.

In 2016/2017, if income goes up by no more than £2,500 ('the disregard') over the level of income for the previous tax year, there is no immediate effect on tax credit entitlement. The disregard for 2015/16, 2014/15 and 2013/14 was £5,000 and in 2012/2013 and 2011/2012 was £10,000. For 2010/2011, 2009/2010, 2008/2009, 2007/2008 and 2006/2007 it was £25,000. Prior to 2006/2007 the disregard was only £2,500. If 2013/2014 income is lower than previous year income by not more than £2,500 then tax credits will not be adjusted. Only if the fall is greater than £2,500 will there be any adjustment to tax credits. See Understanding the disregards for more information.

But two points should be borne in mind:     

  1. The  disregard only operates during the tax year in which the increase in income happens; tax credits for the following year are based initially on the actual income of the year before; and
  2. The run-on payments made in the early part of a tax year before a claim is formally renewed for that year (known as 'provisional payments') are based upon the last known income and circumstances of the claimant. So if the claimant has chosen not to tell the Tax Credit Office about their increase in income, it will not be reflected in their provisional award. The consequence could be an overpayment which they will have to repay later in the year when their renewal claim is processed.

Falls in income can be more problematic in terms of deciding whether to tell HMRC when it happens or wait until the renewal process. The advantage of telling HMRC immediately is that if the fall is greater than £2,500 (from 6 April 2012) the award can be amended to be based on this new lower estimated income less £2,500 which will generally mean an increase in tax credits. This can be helpful at a time that a household has suffered a fall in income.

The disadvantage of reporting the fall in income immediately is that the income may not remain at the level for the rest of the year. If the income subsequently rises again before the end of the tax year, it may create an overpayment. A full discussion of this can be found in our Understanding the disregards section. There are also interactions with Housing Benefit and Council Tax Benefit that can make reporting at a certain time more beneficial.

IMPORTANT NOTE: The advice given above regarding reporting a fall in income is based on our interpretation of the legislation. In particular, the decision on whether to report an income change in part relies on the fact that if reported at renewal time, any underpayment will be paid to the claimant immediately as required by Section 30 Tax Credits Act 2002. However, the HMRC manual suggests that in practice HMRC may use any such underpayment and offset it against any ‘notional’ overpayment that has occurred in provisional payments of the new tax year. If this happens, the claimant should immediately contact HMRC and ask for the underpayment to be paid to them in full and if this is refused should lodge an appeal against the final award for the year just ended at the same time filing a complaint.

Reporting change of employer or childcare provider

HMRC has the right to require information or evidence to substantiate a claim from a claimant's employer or childcare provider. For this reason any change of employer or childcare provider should always be reported to TCO (Tax Credit Office) even though it may not change the award in any way.

Updated 5 July 2016