Tax Credits: Current policy
This section of the website gives information about some of HMRC’s current tax credits policies with links to further information. This material was written by the Low Incomes Tax Reform Group.
- Changes to the system – Introduction
Changes from April 2011
- Lowering the second income threshold
- Main taper rate increased from 39% to 41%
- Family element withdrawal rate increased
- Abolition of the baby element
- WTC for those aged 60 or over
- Childcare element percentage reduced from 80% to 70%
- Decrease in the income disregard
- Up-rating using Consumer Price Index
- Freeze on up-rating of basic and 30 hr WTC elements
- Increase to the child element of CTC above indexation
- Changes from April 2012
- Changes from April 2013
- Autumn Statement 2012
- Welfare Reform Act 2012
- COP 26 - 3 month dispute time limit
- Notional Offsetting
- Dual recovery
- Couples recovery policy
- Changes from October 2014
- Changes from April 2015
A series of fundamental changes to the tax credit system were announced in the June 2010 emergency Budget and the October 2010 Comprehensive Spending Review. Some of these changes were introduced from April 2011, the remainder from April 2012. One final change, the lowering of the disregard for rises in income, is due to start from April 2013 (see further our future changes – tax credits section ).
The original budget and Comprehensive Spending Review documents contain basic information about the changes as well as statistics modelling what impact the changes may have. HMRC also published a summary of the main changes on their website.
Some further changes were announced in the Autumn Statement 2011.
A useful table, summarising the changes and when each began, can be downloaded here.
In 2010-2011 and earlier years, CTC claimants received the full family element (£545) until their income reached ‘the second income threshold’. For most people this was an annual income of £50,000 (although for some it may have been higher).Above that amount the family element was withdrawn at 6.67%, or £1 in each £15 by which income exceeded that figure. Changing the second income threshold to £40,000 in 2011/12 meant that the withdrawal started at lower income levels, and the rate of withdrawal was changed to 41% not 6.67% meaning once it reached the second income threshold it was withdrawn much quicker.
Some families who were receiving the family element of £545 in 2010/11 had their tax credits reduced to Nil from April 2011, whilst other families on higher incomes had a reduction in the amount they received as a result of this change. As explained below, the second income threshold was completely removed from April 2012.
Main taper rate increased from 39% to 41%
From 6 April 2011, the withdrawal (or ‘taper’) rate increased from 39% to 41%.
The first step in a tax credit calculation is to work out the maximum possible entitlement. This maximum (not including the family and baby elements) was then reduced when household income started to go above certain thresholds. In 2010/2011 it meant that if a claim for working tax credit (WTC) or both WTC and CTC was made, entitlement was progressively reduced by 39p for each £1 by which income goes above £6,420 a year. If the claim was CTC only, that income threshold was £16,190 a year.
The change to the withdrawal rate meant that from 2011/2012, claimants will lose 41p instead of 39p for each £1 of income above those thresholds. The 41% taper remains in place for 2012/2013.
Prior to 6 April 2011, the family element (£545) was protected until income reached at least £50,000 (the second income threshold). Once income reached the second income threshold it was tapered away at a rate of 6.67%.
The 6.67% taper rate gives an income range of approximately £8,170 which is added to the second income threshold (whether it is £50,000 or higher) before the family element disappears completely. Therefore, a family whose second income threshold was £50,000 could continue to get at least some family element until their income reached £58,170.
From 6 April 2011, the taper was increased from 6.67% to 41%. The second income threshold was also lowered so that family element was only protected up to an income of £40,000. With an increase of the taper to 41%, the income range reduced to approximately £1,329. Consequently, in 2011/12, a family with a second income threshold of £40,000 would have had their family element disappear at an income of £41,329.
Families with household income above £40,000 will start to have their family element of £545 a year tapered away from 6 April 2011 at a rate of 41%. The current rate is 6.67%.
The baby element of child tax credit was payable to families with a child under one in addition to the family element (making a total of £1090). This was abolished for all claimants on 6 April 2011, including those families who had received it for less than 12 months.
From 6 April 2011, those aged 60 or over can qualify for working tax credit by working at least 16 hours a week. Previously they were required to work at least 30 hours unless they were responsible for a child or children or qualified for the disability or 50+ elements.
From 6 April 2011, the childcare element will provide help with only 70% of eligible costs as opposed to the current 80%.
Couples who both work at least 16 hours per week (unless one is incapacitated, in prison or hospital) and lone parents who work at least 16 hours per week can claim the childcare element. From 6 April 2006 until 5 April 2011, this element provides help with the costs of registered or approved childcare of up to 80% of the maximum set amounts which was £175 a week for one child (80% of which is £140) and £300 a week for two or more children (80% of which is £240).
From April 2011, claimants will only receive up to 70% of the maximum amounts which means up to £122.50 for one child and up to £210 for two or more children. The childcare element also paid 70% of costs in the early years of the system before increasing to 80% from 6 April 2006.
Most families who claim the childcare element are affected by the change. For those who received the full 80% of their costs, they had to pay the 10% differences themselves. Even though claimants may not have been paid any childcare element (because their income was high enough to see it tapered away), they may have received more child tax credit than they would have done as a result of including childcare in the calculation. Families who receive less than 80% of their costs would also have seen a reduction in their award.
One important point to note is the interaction with childcare vouchers. The reduction from 80% to 70% means that the calculation used to determine whether someone is better off receiving the childcare element of WTC or taking childcare vouchers has also changed. There will be a group of people who were better off with WTC in 2010/2011 who may find they will be better off taking vouchers in 2011/2012 and future years. Advice should be sought in these cases to ensure a full better off calculation can be done.
The tax credit income disregard changed from £25,000 to £10,000 from 6 April 2011. From 6 April 2013, this will decrease again from £10,000 to £5,000.
The disregard is one of most complex parts of the tax credit system. We explain the disregard in detail in our 'understanding the disregards’ section. Tax credits are paid based on current circumstances and household income from the previous tax year.
After the tax year ends, HMRC compare actual income for the year just ended with income for the previous year. Provided the income for the year just ended is no more than £10,000 higher than in the previous year, the award will be unaffected and there will be no overpayment. Hence the term ‘disregard’, because the first £10,000 of any income increase is disregarded when calculating your award.
The £25,000 disregard was very generous. Replacement by a reasonable disregard of £10,000 will not affect most people on lower incomes. It may however impact those moving from benefits into work and reduce the level of credits in the first year of employment. However, once the disregard is lowered to £5,000 in 2013, we may see a return of problems which plagued the earlier years of the system when many people were left with overpayments where they had a rise in income of more than £2,500 (as the disregard was originally).
The lowering of the disregard will make it even more crucial to inform HMRC of changes to income as soon as they happen. As our ‘understanding the disregards’ section explains in detail, even if income changes are reported as they happen, because of the way the system spreads income across a year overpayments can still occur. HMRC will need to ensure that these changes are well communicated to both claimants and advisers.
Up-rating using Consumer Price Index
Each year, the rates of tax credits and other benefits are increased. Normally this is in the form of a percentage, linked to the Retail Price Index. However, the change means that from 6 April 2011, the percentage increases will now be decided using the CPI index.
Each April, the elements of tax credits are increased. As explained above, hitherto this has been done by reference to the retail prices index but from April 2011 will be done by reference to the consumer prices index (which has tended to be less generous). From April 2011, the basic and 30 hour elements of WTC will be frozen and will not be up-rated at all for 3 years.
The child elements of CTC (not including the family element) were increased by more than indexation which offset some of the losses caused to families with children from the other changes which affect the taper. As a consequence of changes to the taper rate, the income threshold for people claiming CTC only dropped in 2011-12 to £15,860 and so did the income levels at which CTC was progressively withdrawn. This was the first such fall in CTC entitlement since tax credits were introduced in 2003.
Changes from April 2012
Prior to April 2012, the family element of CTC (£545) was protected until income reached the second income threshold. For most people in 2011-2012 this was £40,000. It was then reduced at a rate of 41% for every £1 of income above the second income threshold.
We explain in detail how to the second income threshold was calculated in our ‘calculating tax credits’ section. It may still be necessary to calculate this in overpayment cases.
From 6 April 2012, the second income threshold has been removed and so the family element is no longer protected. Instead, the family element will be reduced at a rate of 41% immediately after all other credits have been withdrawn. This means that some people who received the family element in 2011-2012 may receive nothing in 2012-2013.
HMRC wrote to 1.3 million of these claimants advising them that their claim would not be renewed for 2012-2013 unless they contacted HMRC by 31st March 2012. The letter that was sent stated that the income limit for CTC is £26,000 which is incorrect and only applies to couples with one child and no disabilities or childcare costs. For some families the cut-off will be much higher, whilst for some (lone parents working less than 30 hours) the cut-off may be lower. See our blog for further details of the letter.
Derek and Eileen have two children. Derek works 30 hours a week. Eileen works 16 hours a week. Their income is £35,000.
In 2011-2012, the received the family element of CTC worth £545. This is because that element was protected until income reached £40,000 (or higher in certain circumstances). The removal of the second income threshold means that their family element is tapered away immediately after the other elements. Their tax credits are tapered away by the time income reaches £32,264.
The 50+ element of tax credits ceased from 6 April 2012. Prior to that date, people aged 50 or over who returned to work after a period claiming certain benefits, were eligible to claim tax credits by working at least 16 hours a week. They received the 50+ element for one year from when they return to work. The element was removed from all claims on 6 April 2012, even those where the claimant had not received it for a full 12 months.
Once the element is removed, unless the claimant has responsibility for a child , qualifies for the disability element or is aged 60 or over, they will need to work at least 30 hours a week to claim. Those who do qualify by working at least 30 hours will no longer receive as much WTC as the 50+ element will not be included in their award for the first year. Thus, the additional incentive to move into work provided by the 50+ element is lost.
Prior to 6 April 2012, initial claims for tax credits could be backdated for up to 93 days if the qualifying conditions were met during that period. You can find out more about backdating in our ‘making a claim section’ . Similarly, changes of circumstances could be backdated up to 3 months, claimants of the disability element were given up to 3 months to inform HMRC of an award of a qualifying benefit and asylum seekers were given 3 months to inform HMRC of a grant of refugee status.
From 6 April 2012, maximum backdating periods have been reduced as follows:
Initial claims – 31 days
Changes of circumstances – 1 month
Reporting qualifying benefit for the disability element – 1 month
Reporting grant of refugee status – 1 month
HMRC have always had a power to introduce an income disregard for falls in income, but have never used it. Prior to 6 April 2012, if income fell as compared to the previous year, tax credits were adjusted so that the claimant received an amount based on their new (lower) income. Claimants did not need to wait until the end of the tax year to report a fall in income, they could inform HMRC of an estimated income at any point during the year and tax credits would be revised to be based on this new lower income.
From 6 April 2012, the new disregard means that tax credits will not be adjusted until income falls by more than £2500 as compared to previous tax year income. This will be a particular hardship for families on low incomes.
We explain how this disregard works in practice in our ‘understanding the disregards’ section.
As explained above, from April 2011 the basic and 30 hr elements of WTC were frozen for three years. In the 2011 Autumn statement it was announced that from 6 April 2012 the second adult element of tax credits would also be frozen.
The freeze on the second adult element of WTC means that the CTC threshold is also be frozen at £15,860 from April 2012. This is because the CTC threshold is set by calculating the income point at which the basic and second adult elements of WTC are tapered away. 2011-2012 was the first year that the CTC threshold fell since the introduction of tax credits. This was due to the freeze on the basic element of WTC and the increase in taper from 39% to 41%.
Prior to 6 April 2012, couples with children needed to work at least 16 hours per week in order to qualify for tax credits. From April 2012, this was increased to a requirement to work at least 24 hours between them with one person working at least 16 hours a week.
For couples who worked above 16 hours, but under 24 hours in 2011-2012 meant that one person needed to increase their hours to at least 24 per week or the other needed to start working so that their combined hours increased to 24 (but with one partner working at least 16).
Couples with children who qualify for WTC in some other way will not be subject to the new hour requirement. This applies to people who qualify for the disability element of WTC or who are aged 60 or over. Both groups will continue to qualify for WTC by working at least 16 hours.
Couples with children where one person is working at least 16 hours and their partner is:
- in prison
- in hospital
- entitled to carer’s allowance
will continue to qualify for WTC by working at least 16 hours (i.e. there is no change from the previous criteria).
HMRC stopped the WTC elements of all couples with children who did not meet the new 24 hour requirement on 6 April 2012. This included claimants who be subject to one of the exceptions as HMRC could not identify these people. Claimants therefore needed to contact HMRC before 6 April to ensure their payments continued. More information about this can be found in an article on our blog.
Childcare element and carers
As explained above, entitlement by one partner in a couple to carer’s allowance exempts them from the new 24 hour rule for couples with children. This exception was announced in the Budget 2012 following a letter sent to Ministers from a coalition of charities led by Low Incomes Tax Reform Group.
The Budget announcement also introduced an exception in the childcare element. Prior to 6 April 2012, couples are required to work at least 16 hours each (combined 32 hours) a week in order to claim help with their childcare costs. The exception to this requirement is where one partner works at least 16 hours a week and the other is incapacitated, in prison or hospital. The Budget announcement means that entitlement to carer’s allowance has been added to the list of exceptions. This means that a couple, where one partner works at least 16 hours a week and the other is entitled to carer’s allowance can claim help with their childcare costs.
It was announced in the June 2010 Budget and the October 2010 Comprehensive Spending Review that the CTC child element would increase by £110 above indexation from 6 April 2012. This planned change was reversed in the Autumn Statement 2011. The CTC element (along with the disability elements of WTC and CTC) increased by CPI of 5.2%.
The tax credit income disregard changed from £25,000 to £10,000 from 6 April 2011. From 6 April 2013, this decreased again from £10,000 to £5,000.
The disregard is one of most complex parts of the tax credit system. We explain the disregard in detail in our ‘understanding the disregards’ section.
Two announcements were made in the Autumn Statement 2012 relating to the collection of tax credits debt. HMRC will be running two pilots in 2013, the first conduting a payment by results pilot on outsourcing tax credits debt to a private debt collection agency and the second working with DWP to look at recovery of overlapping debts (where someone owes money to both HMRC and DWP). You can find out more about these pilots in our pilots being trialled section.
A pilot will commence during 2013/14 which will require some tax credits claimants who report high childcare costs to provide evidence to HMRC. This is part of the error and fraud programme. You can find out more about calculating childcare costs and particularly the issues that arise in compliance interventions in our understanding childcare section.
The Government will require annual parental certification that child aged over 16 is in full time non-advanced education or approved training. This is part of the error and fraud programme as HMRC believe a high number of overpayments relate to claimants who fail to report that their young person has left FTNAE or training.
Several changes to tax credits legislation were introduced by the Welfare Reform Act 2012. Many of the changes relate to the transition of tax credits claimants to Universal Credit. You can find more detailed information on each of these provisions in our transition to UC section.
One other major change was the introduction of a ‘loss of tax credits’ provision into the Tax Credits Act 2002. You can find out more about this in our Dealing with mistake and fraud section.
A number of provisions were introduced that relate to tax credits fraud and information sharing. You can find out more about those provisions in our Dealing with mistake and fraud section.
COP 26 - 3 month dispute time limit
Section 28(1) Tax Credit Act 2002 sets out the law on recovery:
‘Where the amount of a tax credit paid for a tax year to a person or persons exceeds the amount of the tax credit to which he is entitled, or they are jointly entitled, for the tax year . . . the Board may decide that the excess, or any part of it, is to be repaid to the Board.’ (italics supplied).
Note that unlike the position on social security benefits, HMRC have the discretion to recovery any overpayment no matter how it was caused. To deal with this discretion HMRC have a policy for overpayment recovery which is set out in COP 26.
The COP 26 policy is often referred to as the ‘dispute process’.
From 6 April 2013, HMRC have introduced a 3 month time limit to the dispute process. This is a major change to the process for claimants and advisers. The time limit is complex in practice. More detail about how it works can be found in the dispute process section.
Sometimes, tax credits claimants who form a couple or who become single, either because they separate or because one partner dies, are slow in reporting the change to HMRC. Yet in many cases, if they had acted promptly they would have continued to be entitled to tax credits, albeit in a different capacity.
Prior to 17 May 2007, HMRC had a policy of notional offsetting. This policy was suspended on 17 May 2007 and from then until 18 January 2010, HMRC would recover the whole of any overpayment arising on the old claim, but give no credit for what the claimant would have received had they made a new claim at the right time.
From 18 January 2010, HMRC introduced a new policy that means tax credits recipients who start to live together, or who become single after being part of a couple, but are late reporting the change to HMRC, can reduce the overpayment on their old claim by whatever they would have been entitled to had they made a new claim promptly.
This new policy applies to overpayments arising from 18 January 2010, but also to overpayments that were still outstanding as of that date. So, if an overpayment has been repaid in full prior to 18 January 2010, the new policy will not apply. However, if any part of it remains unpaid, offsetting can be applied to it.
To request notional offsetting, claimants should contact the tax credit helpline to ask for their case to be referred to the ‘notional offsetting (or notional entitlement)’ team in the Tax Credit Office.
Note that the notional entitlement set-off will not cover the three months by which the claimant will be able to backdate their new claim. Normally HMRC will grant the three months backdating automatically, but if that doesn’t happen, they will need to ask for it.
On the whole HMRC policy is to be lenient and not charge a penalty where the failure to report has resulted from a mistake or misunderstanding. If HMRC think the claimant has been negligent in not reporting, and they are left with a net overpayment even after notional entitlement has been applied, they may be charged a penalty against which they can appeal.
If the failure to report is dishonest, the penalty may well be substantial and in extreme cases notional entitlement will not be given.
More information about notional offsetting is available in the HMRC compliance manuals:
- Original policy: Practice prior to 17 May 2007
- Previous policy: 17 May 2007 – 17 January 2010
- Current policy: From 18 January 2010
These manuals cover notional offsetting from a compliance perspective. It should be noted that notional offsetting applies to non-compliance cases in the same way.
This policy is operated by Debt Management and Banking in relation to overpayment recovery.
Some people will be paying back two overpayments, one via ongoing recovery and another via direct recovery. This often happens where there is an overpayment on an old claim, and a new overpayment on a current claim. Since August 2009, HMRC have implemented a new policy which means that any direct recovery action should be suspended until the ongoing recovery ends.
Whilst we welcome this policy, HMRC are not proactive in telling claimants about it. If this applies, you should ask Debt Management and Banking to suspend the direct recovery action. Further details can be found in the HMRC intermediaries guide and in the Debt Management Banking Manual Online.
More information about tax credit debt can be found in our dealing with debt section.
This policy is operated by Debt Management and Banking in relation to overpayment recovery.
The law says that an overpayment debt for a couple can be collected by HMRC in full (but only once!) from either the claimant or their partner. The stated policy of HMRC where this has happened following a household breakdown is to write to both members of the former couple (making every effort to trace any former partner for whom they do not have an up-to-date address).
If the claimant believes that there should be a difference in what they and their former partner should pay, then HMRC will take into account the circumstances of both of them and may ask each of them to pay a different amount, or one of them to pay the full amount. Alternatively, they can agree between them to pay different amounts and inform HMRC of this decision.
Prior to August 2009, HMRC policy was to allow each party to repay 50% of the overpayment. However, when confirming this agreement in writing, HMRC reserved the right to return to the partner who was engaging with them for the other 50% if they could not trace the other partner.
LITRG, along with other representative bodies, expressed concern that HMRC often pursued the engaging partner with vigour whilst the other partner remained ‘untraceable’. This often meant the mother with care of the children had to repay the whole joint overpayment debt where the absent partner was difficult to trace.
Since August 2009, HMRC have implemented a much fairer policy in these situations. As before, provided a person engages with HMRC, they will allow repayment of 50% of the joint debt. Provided that this 50% is paid (either by lump sum or on a payment plan) HMRC will not pursue that person for the remaining 50%. Instead they will pursue the other partner, and if they cannot collect the money will not go back to the engaging partner to collect it.
It is important to note that the law still allows HMRC to pursue either partner for the full amount of the joint debt. Also, this process is not well advertised by HMRC, so you should ensure that you ask Debt Management and Banking if you think it applies.
HMRC announced in the Autumn Statement 2012 that they would be introducing cross award recovery from April 2014. It has now been confirmed that this will begin in October 2014. Currently, where an overpayment debt exists on a claim that has ended, it cannot be recovered against a later tax credits claim even if that claim is made by the same person. Instead the debt is passed to Debt Management and Banking for direct recovery.
The legislation has never prevented cross claim recovery, but the HMRC IT system was unable to do this. Given the growing amount of overpayment debt, and the fact it is likely to increase over the next few years, HMRC will introduce a change to their IT to allow cross claim recovery.
We have added some further information about how cross-year recovery will work in our dealing with debt section.
HMRC announced in Autumn Statement 2013 that they would expand the use of private sector debt collection services in tax credits during 2014 and increase the use of private sector firms in carrying out compliance checks. It was also announced that HMRC would use private firms to help with debt recovery in the earlier stages on a payment by results basis.
HMRC announced in the Autumn Statement 2013 that from April 2015 tax credits payments will be stopped in-year where, due to a change in circumstances, a claimant has already received their full entitlement. This is to prevent a build up of overpayments.
In the Autumn Statement in December 2014, it was announced that the rules for self-employed workers claiming tax credit would be tightened. Initially it was suggested that self-employed claimants whose earnings were below 24 hours a week x national minimum wage would be asked to show that their self-employment was genuine and effective.
In responding to the Autumn Statement, LITRG said that the proposed earnings x hours worked test was likely to discriminate unlawfully against disabled self-employed people who may not be able to work 24 hours a week for health reasons and who qualified under existing legislation on the basis of a 16 hour week.
The actual legislation (SI 605/2015), effective from 6 April 2015, delivers a slightly different rule, whereby a claimant must meet the condition of being either employed or self-employed, as defined. And to be self-employed, their activity needs to be undertaken on a commercial basis with a view to making a profit.
The additional conditions from the 2014 Autumn Statement announcement, that a self-employed claimant must register as self-employed with HMRC for self-assessment and provide their unique taxpayer reference number with their claim, have been postponed for introduction at a later date.
HMRC published a briefing paper about the new rules which offers some information about how the new condition will be applied and it still refers to selecting cases on the basis of a minimum earnings threshold equivalent to qualifying working hours x national minimum wage. But it leaves many unanswered questions at this stage, such as how HMRC will determine whether an activity is undertaken on a commercial basis, whether there will be any practical implications for the difference in tax and tax credits interpretation of status and how claimants and prospective claimants will be helped to ensure they claim on the correct basis to avoid unwittingly incurring overpayment.
Updated 10 April 2015