Tax Credits: Real Time Information and tax credits

From April 2014, HMRC have been using Real Time Information provided by employers and pension providers for tax purposes to help finalise some tax credit claims. This page explains more about RTI and how it will be used for tax credits.

Note: It is important that claimants and advisers carefully check income figures that are taken from the RTI system as although they may be correct as compared to the claimant’s P60 figure, there may be deductions that can be made to further reduce the figure for tax credit purposes.

What is Real Time Information?
What must be reported?
How does an employer report RTI information?
Exceptions to RTI
How will HMRC use RTI for tax credits?
RTI and finalisation of claims
    How is RTI data used to finalise claims?
    What should claimants do to check RTI figures?
    What happens if the claimant reports a different figure?
RTI and provisional payments
RTI and in year changes of income

What is Real Time Information?

Becoming an employer comes with certain obligations in respect of tax and national insurance. Generally employers are tasked with collecting tax and national insurance from their employees pay and sending that money to HM Revenue and Customs (HMRC).

In the past, HMRC required employers to send payments of tax and NI to them, generally monthly, and then report those figures after the end of each tax year on a series of forms. On 6 April 2013, HMRC introduced a new system of real time reporting for employers. It is often called the RTI (Real Time Information) system.

It means that employers must send details to HMRC on or before the time they pay their employees. This information must normally be sent to HMRC electronically as part of their routine payroll process.

What must be reported?

Employers must report payroll information to HMRC. This includes the employees pay, tax and deductions. Employers will need to report details of nearly all employees they pay, no matter how much they are paid and how often they are paid (for example once a year).

(However if ALL employees are paid below the NIC Lower Earnings Limit of £112 per week AND that employment is their only job an employer will not strictly have to register a PAYE “scheme” and thus no RTI submissions will be due), More information is available on the HMRC website.

How does an employer report RTI information?

Employers will need to send submissions to HMRC. There are two types of submission – an FPS (Full payment submission) and EPS (Employer payment summary).

An FPS must be sent to HMRC on or before the date of payment to the employee. It records the year to date figures of tax, national insurance and pay and also the totals for that particular pay period.

The EPS submission is used when employers need to recover statutory payments (such as sick pay, maternity pay etc.) and are also used if there is a nil payment due for the month (as no FPS submission will be made).

The FPS submission will include a great deal of information about the employee including the range of hours they work. You can find out the full details included in an FPS on the HMRC website.

Exceptions to RTI

Some care and support employers (people who become employers because they take on a personal assistant to help with their care needs) are able to submit PAYE information to HMRC using paper rather than online. They must contact HMRC if they want, or need, to do this.

If an employer is "digitally excluded", that is that they are unable for whatever reason to access the internet and do things online, they can to ask HMRC for permission to continue with paper filing. HMRC’s intention is that this option will only remain in place up to April 2017.

Certain religious groups, whose beliefs are incompatible with the use of electronic methods of communication may also be exempt from online filing requirements.

More information is available on LITRG’s Disability Tax Guide Website.

How will HMRC use RTI for tax credits?

The data that HMRC receive from employers and pension providers about a person’s income will be sent to the Tax Credits Office computer. This will enable tax credits to use RTI data about a claimant’s employed earnings and some private pensions to finalise claims and to amend current year income estimates.

RTI and finalisation of claims

Since April 2014, HMRC have been using RTI data to help finalise some tax credit claims. You can read more about the finalisation process in our renewals section.

How is RTI data used to finalise claims?

Where RTI data is obtained, claimants fall into two groups:

  1. Where the claimant(s) have only employed income or occupational pension income (with no benefits in kind, statutory payments or employer pension contributions) they will receive an auto-renewal notice where HMRC will list the income figures received from the RTI system. HMRC will use these figures unless the claimant contacts them with an alternative figure.
  2. Where the claimant has employed income or occupational pension income with benefits in kind (that HMRC know about), certain statutory payments (such as statutory maternity pay, paternity pay, adoption pay), employer pension contributions or is also self-employed, RTI data will be replayed on the renewal form but the claimant will be a ‘reply-required’ case and will have to declare their income by 31 July or their payments will stop.

HMRC will not seek to obtain RTI data in the following cases:

What should claimants do to check the RTI figure?

If the claimant is an auto-renewal case, HMRC will finalise the claim for the year just ended and set the award for the new tax year based on the RTI data UNLESS THE CLAIMANT TELLS THEM THE FIGURE IS INCORRECT. It is therefore crucial the claimant checks it is correct and also considers whether there are any deductions that can be made (See below).

If the claimant is a reply-required case, the RTI figures on the renewal notice are for guidance only. THE CLAIMANT SHOULD CHECK THE FIGURES AND ENSURE ANY DEDUCTIONS ARE MADE BEFORE COMPLETING THEIR FIGURES ON THE FORM.

It is important for advisers and claimants to understand the limitations of RTI. The information that employers sent to HMRC using the RTI system may well be correct for tax purposes but that doesn’t mean it is the correct figure for tax credits purposes. There may be other income that the claimant has that is outside of the RTI system and that they need to tell HMRC about or they may be able to make deductions from their income that will reduce the income figure.

The auto-renewal form, whilst telling claimants to inform HMRC of any other income, does not mention that the claimant may be able to make various deductions from their income.

Other income

The following list is not exhaustive but includes some of the common sources of income that claimants may have and which HMRC will not generally know about from the RTI feed. If the claimant has pension income, HMRC will automatically ignore the first £300 which means that if there is any other pension, investment, property, foreign or notional income the £300 should not be deducted again. See our what is income section to see how this £300 disregard works.

You can find more about what counts as income from our income section.

Deductions

Listed below are some of the main deductions that claimants might be able to make from their income:

  1. Statutory maternity, paternity and adoption pay count as employed income and HMRC will have these statutory payments included in the RTI feed. However, only any amount over £100 is included, which in effect means you can deduct £100 for every week of statutory maternity, paternity or adoption pay (providing the amount was above £100). So for example if you received £138 per week maternity pay, only £38 should be counted for tax credits whereas the RTI information sent to HMRC will include the full £138.
  2. Work expenses that the claimant had to pay in doing their job and which relate only to their job and are deductible for income tax purposes. This does not include expenses if the employer reimbursed them. It includes travel costs such as mileage, except for the cost of getting to and from work.
  3. Any payments made that are deductible for income tax purposes such as fees and subscriptions to professional bodies, employee liabilities and indemnity insurance premiums, agency fees for entertainers.
  4. Flat rate expenses, agreed by an employer and HMRC to maintain or renew tools that are necessary to do the job or special clothes that are necessary. The amount of allowable expenses will be shown on the P2 coding notice.
  5. The gross amount of any pension contributions paid into a pension scheme registered with HMRC. This includes a stakeholder pension and any free-standing additional voluntary contributions. However this does not normally include payments into an occupational pension scheme where the employer takes the contributions from pay before deducting tax as these are already taken into account.
  6. The gross amount of any donations made through Gift Aid to charity.
  7. Any trading losses from self-employment in the current year from the claimant or their partner. This must be done and then any remaining loss can be carried forward against income for the same trade in future years. See form TC825 for more information.

The GOV.UK website has more information on calculating income from employment.

What happens if the claimant reports a different figure?

If the claimant reports a figure to HMRC that is different to the RTI figure then HMRC will look at the case further. If over the phone, the adviser will check for common discrepancies and may accept the claimant’s figure without further action. If they cannot do so, then the case should be referred to a team who will look into the discrepancy further. Similar action will take place if figures are sent back by post.

In both cases, HMRC should not just use the RTI data without seeking further explanation as to the difference from the claimant. A form TC221 should be issued to the claimant asking for further information.

If HMRC use the RTI figures and the claimant believes they are incorrect they should follow the appeals process.

RTI and provisional payments

At the beginning of the year, HMRC uses the RTI data for the tax year just ended to recalculate provisional payments. These provisional payments are made whilst the renewals process is being carried out.

This means that if the information is wrong, claimants could find their provisional payments stopped and the error cannot be corrected until they receive their renewal form.

It also means that if claimant’s have made deductions from their income in their previous year income, for example because of regular pension contributions, they may find their award goes down because HMRC will not know about these when setting their provisional payments for the next year.

It appears there is nothing a claimant can do in this situation because provisional payments are discretionary and there is no right of appeal until HMRC make a decision following the renewals process when the claimant can appeal if HMRC have not allowed for the deductions listed above.

RTI and in year changes of income

HMRC will use the information provided by RTI to check and compare to the current award.  So, for example, if 2015/16 income was £20,000 the 2016/17 award would be initially based on £20,000. If RTI data on 30 September 2016 showed income to date of £15,000, suggesting annual income of £30,000, this would be flagged up to HMRC.  As the forecast figure is more than £2,500 (this is the current income increase disregard) greater than the figure on which their CY award is based, HMRC will contact the claimant. This contact will be made via text message, recorded phone message or a letter (if no phone number is held by HMRC). Claimants will have 14 days to contact HMRC and if they do not, then HMRC will change the current year estimated income based on the information held from the RTI database.  

Again, it is important that claimants understand that the figure from RTI will not always be the right figure to work out their tax credit award. For example, in the above example, it could be that the claimant is making private pension contributions that would reduce the £30,000 figure. We have covered the deductions that can be made above.

If HMRC change the award and the claimant disagrees then they should appeal the decision.

From April 2017, HMRC will be carrying out a trial where they use RTI data for claimants who started a new job in the previous year to calculate a more realistic income for 2017/18 current year income. HMRC say that this is to put the claim on a more accurate footing to help prevent an overpayment further down the line. Claimants should receive a notification telling them about the changes to their award.

Updated 20 February 2017