Tax credits: Tax credits and coronavirus

There were several changes made to tax credit rules as a result of the coronavirus pandemic. These changes were temporary and most have been ended. To help advisers, this page sets out all of the changes that were made and explains them in further detail.

Work changes

Working tax credit entitlement depends on the claimant being in qualifying remunerative work (QRM). This QRM test requires claimants to meet certain hours thresholds (16, 24 or 30) depending on their circumstances. We explain the full rules in our WTC entitlement section. 

Many jobs have been affected by the coronavirus pandemic. Some of those changes will be permanent, others temporary. HMRC introduced special rules to allow temporary changes due to coronavirus to working hours to be effectively ignored for WTC purposes until 30 September 2021. This means HMRC treated the person as working the number of hours they were working before coronavirus for WTC purposes.

At the outset of the pandemic, HMRC extended their definition of ‘normal’ working hours so that disruptions to normal working hours as a result of coronavirus would not have any effect as long as they lasted no more than 8 weeks (this increased from 4 weeks which had always been part of HMRC’s guidance for temporary disruptions to normal working hours). Once it was clear further support would be needed at the end of those 8 weeks, HMRC introduced legislation to ensure claimants with temporary work disruptions as a result of coronavirus would remain entitled to working tax credit based on the hours they were working before the coronavirus pandemic. In other words, HMRC would continue to treat the claimant as in qualifying remunerative work.

Under that legislation, the adjusted rules applied until the end of the Coronavirus Job Retention Scheme (CJRS) (even if the claimant did not benefit from support under that scheme). The CJRS ended on 30 September 2021. From 1 October 2021, HMRC introduced a series of run-ons depending on the claimant’s work situation from that date.

In addition, from 14 January 2021, any periods of absence from work because the claimant has been told to self-isolate due to coronavirus by the NHS Test and Trace service (or the equivalent services in the devolved administrations) or because they have been instructed not to attend work as a direct consequent of legal restrictions due to coronavirus, are disregarded when working out the claimant’s normal hours of work.

Rules until 30 September 2021

The rules outlined in the table below applied until the 30 September 2021 for temporary changes to work as a result of coronavirus. See below for what happened from 1 October 2021.

Change What does it mean for working tax credit? When do I need to report a change to HMRC?
Temporary reduction in hours: For example, you normally worked 32 hours a week but your hours were reduced to 12 hours a week due to the coronavirus crisis. Your employer might have claimed part of your wages through the Job Retention Scheme. HMRC treated you as continuing to work your normal hours (those before the reduction) until 30 September 2021. for what happens from 1 October 2021 if your hours are not back to the level you need to qualify for working tax credit.

You did not need to tell HMRC about any temporary reduction because of the coronavirus before 30 September 2021. See below for what you need to report from 1 October 2021.

Temporarily laid-off/Furloughed: This means your employer did not have enough work for you but intended to recall you when work bec available again.

Your employer may have claimed part of your wages through the Job Retention Scheme.		 HMRC will have treated you as continuing to work your normal hours (those before the temporary lay-off) until 30 September 2021. See below for what happens from 1 October 2021 if your hours are not back to the level you need to qualify for working tax credit.

You did not need to tell HMRC about any temporary lay-off or if you were furloughed because of coronavirus until the Job Retention Scheme closes.

See below for what you need to report from 1 October 2021.

Note: if the lay-off was made permanent at any point or you were made redundant you must have reported this change straight away to HMRC.

Unpaid leave: This is where you are were still employed but agreed with your employer that you would take leave that was unpaid.

 HMRC will have treated you as continuing to work your normal hours (those before the temporary lay-off) until 30 September 2021. See below for what happens from 1 October 2021 if your hours are not back to the level you need to qualify for working tax credit.

You did not need to tell HMRC that you were on temporary unpaid leave because of coronavirus. See below for what you need to report from 1 October 2021.
Self-employed: If your hours reduce or your self-employed work temporarily ceased due to coronavirus.

As long as you were still trading (i.e. you didn’t completely close down your business) HMRC treated you as continuing to work your normal hours (those before the reduction due to the coronavirus situation) until 30 September 2021. See below for what happens from 1 October 2021 if your hours are not back to the level you need to qualify for working tax credit.

You did not need to tell HMRC about a temporary change in your hours because of the coronavirus. See below for what you need to report from 1 October 2021.

NOTE: if you ceased self-employment completely and didn’t intend to continue trading then you should have reported that as a change of circumstances to HMRC when your self-employment ceased.

Temporary run-ons from 1 October 2021

If normal working hours reduce (including to Nil) on or after 1 October 2021 the usual tax credit rules apply. Any changes to normal working hours must be reported. See our working tax credit section which explains how temporary changes to hours are treated for working tax credit under normal rules.

If the temporary rules set out in the table above applied to a claimant up to 30 September 2021 due to coronavirus, then what happened from 1 October 2021 depended on whether or not their hours were back to the level they need to qualify for working tax credit. If they were back to that level from 1 October, they needed to do nothing further. 

Example

Tariq needs to work at least 16 hours a week to qualify for working tax credit. Prior to October 2020, he was working 25 hours a week. From October 2020, he was on a flexible furlough and working 10 hours a week. He resumed his normal hours of work (25 hours a week) from 17 September 2021. He does not need to notify HMRC as the temporary reduction in his hours had ended and he was back working his normal hours before 1 October 2021.

From 14 January 2021, new legislation introduced complex rules including a series of run-on payments for working tax credit for people covered by the temporary coronavirus work. These rules applied to those whose hours had not returned to the level required from 1 October 2021. The changes were extremely complex and the information initially published by HMRC on what claimants, who were covered under the temporary rules set out in the table above, should do from 1 October 2021 was misleading for certain groups of claimants. See the LITRG press release for full details which includes details of when the guidance was corrected.

The rules from 1 October 2021, for those covered by the temporary measures up to 30 September 2021 and who had not resumed the hours required for WTC, could be summarised as follows:

Example

Stella and Zeb both need to work at least 16 hours a week to qualify for working tax credit. Prior to January 2021, they were both working 20 hours a week. They were both put onto flexible furlough in January 2021 and started working 12 hours a week each. In September, their employer told them they will be resuming their normal hours of work (20 hours a week) from 25 November.

Stella does resume her normal working hours from 25 November. Stella does not need to notify HMRC as she has resumed her normal hours of work by 25 November.

However, Zeb does not resume his normal hours of work and on 25 November his employer asks him to continue working reduced hours for the time being. Zeb must notify HMRC that his hours have changed (from 20 to 12). He will be entitled to working tax credit due to the 4 week run-on from 25 November and then his working tax credit will end. If he resumes his normal hours within that 4-week period, he will need to notify HMRC immediately and then his working tax credit will be allowed to continue.

Example

Mia needs to work at least 30 hours a week to qualify for working tax credit. She was put on furlough in August 2020 as no work was available. When the furlough scheme ended on 30 September 2021, Mia’s employer told her that there would be no work until mid-December and she would therefore be on unpaid leave until then. Mia must notify HMRC that she has a change to her working hours (from 30 to none) from 1 October. She will be entitled to a 4 week run-on of working tax credit from 1 October. If her normal hours resume within that 4-week period, she must notify HMRC immediately about the increase in her hours and her working tax credit will be allowed to continue.

Example

Jenna needs to work at least 16 hours a week to qualify for working tax credit. She normally works 35 hours a week but has been on flexible furlough and working 25 hours a week since March 2021. On 7 September, she agrees to reduce her normal hours from 35 to 25 hours a week permanently. She should notify HMRC of this permanent change immediately because, as her hours have permanently reduced below 30, she will stop being entitled to the 30-hour element. If she does not tell HMRC within 1 month from 7 September, she may receive a penalty.

Periods of leave

Under normal tax credit rules, a person can continue to be treated as in qualifying remunerative work even though they are not working – for example during the first 39 weeks of maternity leave. We explain the rules in full in the WTC entitlement section of this website.

However, to qualify under these rules, a person must meet various conditions including being in qualifying remunerative work immediately before the period of leave. Those who had their hours reduced temporarily or who were placed on furlough as a result of coronavirus, set out in the table above, were only treated as in qualifying remunerative work until 30 September 2021. They were not actually in qualifying remunerative work. As a result, the legislation did not technically allow someone to move from the special work rules in place for temporary changes due to coronavirus into a period of maternity leave and still keep their WTC entitlement. This meant, for example, that someone who was furloughed and then went onto maternity leave would no longer qualify for WTC for the next 39 weeks as they would have done under the normal rules.

HMRC did not intend for this to happen and as a result made amendments to the legislation from 14 January 2021 to clarify this position. This means, for example, that someone who was furloughed but then went onto maternity leave continued to be treated as in qualifying remunerative work for the full 39 weeks (assuming any other conditions are met).

HMRC also introduced legislation to help with the opposite situation, where someone moved from a period of leave (where they a treated as in qualifying remunerative work under the normal tax credit rules) to a period of furlough or reduced hours on a temporary basis due to coronavirus. Although the legislative changes to support this are not entirely clear, our understanding is that HMRC’s intention was to allow people to end a period of leave and to then benefit from the rules outlined in the table above (in place to 30 September 2021) if their work was affected temporarily due to coronavirus. 

See the previous section for information about those who move to a period of leave during a run-on period after the ending of the coronavirus working hour relaxations.

30-hour element            

Some people are entitled to receive an additional element in tax credits called the 30 hour element. We explain how it works in the main tax credit section of our website. 

If the claimant received the 30 hour element before their hours reduced or they were temporarily laid off due to coronavirus, that continued because HMRC continued to treat them as working the same hours as immediately before the reduction up to 30 September 2021.

However, HMRC introduced legislation which essentially meant that you could not add together hours that someone was treated as working under the special coronavirus rules with any hours that they started to work in another job, in order to newly qualify for the 30 hour element.

Example 1 (applied up to 30 September 2021)

Sarah is a lone parent and usually works 16 hours a week. She is temporarily laid off from her job. Her employer allows her to take up other work and she starts working 16 hours a week at a local supermarket. Sarah is not entitled to the 30 hour element because the rules state you cannot add hours from a job where you are temporarily laid off to hours you work in order to meet the threshold.

If Sarah was to work 30 hours a week at the supermarket, then she would qualify for the 30 hour element.

Example 2 (applied up to 30 September 2021)

Shaun and Amber each work 16 hours a week and have two children. They receive the 30 hour element in their tax credits. Shaun is temporarily laid-off from his job and Amber continues to work 16 hours a week. The couple continue to receive the 30 hour element because they qualified for it before they were impacted by coronavirus.

We are aware that there is an anomaly in the legislation which meant that couples with children who did not qualify for the 30 hour element prior to coronavirus but who took on additional work such that they would have qualified, are excluded.  

Childcare element

Childcare support continues as normal for those who meet the relevant conditions and incur childcare costs. We explain the conditions to claim the childcare element in the main section of our website. 

To qualify for the childcare element, working tax credit claimants have to meet certain hours requirements as well as other conditions. Hours that claimants were treated as working under the special coronavirus rules outlined above count when considering whether they qualified for childcare support.

During the early stages of the pandemic, some childcare providers shut down but asked parents to continue paying their fees or to pay retainer fees. Under a strict reading of the legislation, childcare costs cannot be claimed if the child is not attending or taking up their place. However, HMRC confirmed that they would temporarily continue to pay the childcare element in cases where childcare costs were incurred but the claimant was unable to send their child to the provider due to coronavirus. This concession was withdrawn from 7 September 2020 and childcare costs paid for childcare that does not take place have not been accepted for tax credits from that date.

In January 2021, HMRC stated that if childcare is not being provided, but parents and carers are being asked to keep paying their provider in full or in part, these costs cannot be covered by tax credits and where childcare stops being provided, HMRC say they will continue to pay the childcare element for four weeks in such cases.

HMRC say that people claiming the childcare element need to notify HMRC as soon as possible if their child stops going to childcare for four weeks or more, where they would normally expect to be going to childcare, to avoid overpayment. The four-week period is calculated from the last day the child attended the provider.

This also applies where the childcare is still available, but the parent or carer does not send their child and where the child stops attending childcare for more than four weeks due to illness or other reasons, regardless of the coronavirus situation.

Although HMRC’s announcement confirms their position, it is not entirely clear how this fits with the existing childcare element rules, particularly in relation to the four-week run-on. We have sought further clarification from HMRC and understand that the rationale for this approach lies in the fact that, where the childcare provision is not being received (for any reason), any payments made to cover the cost of that provision are not relevant childcare costs for tax credit purposes, ie relevant childcare costs are nil. Where relevant childcare costs reduce to nil for 4 weeks in a row, there is a change to the costs (to nil) which must be reported to HMRC. This effectively patches together the 4-week run-on allowed for changes to regular childcare costs and allows a similar leeway for those who calculate their childcare costs by averaging. Should the child return to the childcare provision at the start of the 5th week, we assume the re-commencement of childcare costs will also need to be notified to HMRC to ensure the award remains on the correct footing.

Time limit for reporting changes of circumstances

There is no need to inform HMRC about temporary changes to working hours due to coronavirus where the special rules for work changes applied until 30 September 2021.  See above for the position from 1 October 2021. Claimants should have told HMRC if their hours changed permanently, they were made redundant or they gave up their self-employment (cease completely and don’t intend to continue trading in the future) within the usual one month time limit.

All other changes should have been reported to HMRC within the usual one month time limit.

From 23 May 2020 until 30 September 2021, critical workers have three months (instead of the usual one month) to notify HMRC of changes that reduce or increase the amount of their tax credits.

The time limits for telling HMRC about changes in relation to the disability elements were also extended for critical workers until 30 September 2021. This means that they had up to three months (instead of one month) to tell HMRC that they have been awarded a qualifying disability benefit. 

Note that where a change reduces the amount of tax credit entitlement, this will usually have effect from the date of change, even if it is reported later. Even though a claimant may have 1 month (or three months if a critical worker until 30 September 2021) to tell HMRC, there is a risk that any delay in telling HMRC could increase any overpayment. Similarly, if there is a delay reporting a change that increases the amount of tax credits, it will only be backdated within the usual rules.

For this purpose, a critical worker meant:

in England in the version of the document entitled “Guidance for schools, childcare providers, colleagues, local authorities in England on maintaining educational provision” published by the Cabinet Office and the Department for Education on 14 May 2020;
in Scotland in the document entitled “Coronavirus (COVID-19): school and early learning closures – guidance about key workers and vulnerable children” published on 31 March 2020;
in Wales in the version of the document entitled “Coronavirus key (critical) workers” published on 18 May 2020; and
in Northern Ireland in the document entitled “General Guidance on COVID-19 for schools”.

Renewal changes 

Due to the coronavirus pandemic, HMRC decided to automatically renew the majority of tax credit claims in 2020. This means that people used to getting a normal reply-required renewal and complete a declaration, received a different notice (an auto-renewal notice). Unless they contacted HMRC by the 31 July, HMRC will have finalised entitlement for 2019/20 and set the initial award for 2020/21 using the figures they held at the time.

The circumstances and income figures used to calculate final entitlement for 2019/20 and set the initial award for 2020/21 should have been shown on the auto-renewal notice. Unfortunately, around 1 million people received notices which did not include the income figures used to calculate these two figures. If no income figure was shown on the notice, it does not mean HMRC did not take any income into account, it just means they did not show the figure they used in the calculation on the notice. To correct this, HMRC sent extra letters to people showing them the income figures they used in their calculations.

We published a detailed Q&A in June on the LITRG website about this renewals process and this error where you can find out more.

HMRC returned to their more usual approach for the 2021 renewals exercise and so more people will received a reply-required renewal.

Estimated income issues

Sometimes people do not know their actual income figure for the tax year that has just ended by the time they receive their renewal papers. This is often the case for self-employed tax credit claimants. Usually, such claimants will declare an estimated income to HMRC by 31 July and then confirm their actual income by the following 31 January.

Because most people had their claims auto-renewed in 2020, HMRC treated the income figure shown on the auto-renewal notice (or detailed in the additional letter sent to claimants) as the actual income figure to finalise the claim by 31 July unless the claimant contacted them to tell them that the income was only an estimate at that point. Even if the income figure on the renewals notice or the letter matched the claimant’s own estimate, they still needed to contact HMRC and ask them to mark it as an estimate. If the claimant did not contact HMRC, the claim was finalised. Normally this would mean the claimant wouldn’t be able to give HMRC their actual final income by 31 January – however we understand that HMRC allowed self-employed claimants to provide a final figure up until 31 January 2021 where they intended the figure on their auto-renewal notice to be an estimate.

HMRC have also confirmed that in exceptional circumstances where claimants missed the 31 January 2021 deadline to provide their actual income figures, they wouldconsider accepting the actual income figure later if the reason for the delay was related to the coronavirus pandemic. This same relaxation was also confirmed for the 31 January 2022 second specified date deadline. You can read more about this in our blog. 

Tax credit debts

Although DWP suspended recovery of debts from UC for a period during 2020, HMRC did not do the same in tax credits. However, we understand that HMRC allowed time to pay arrangements, suspending recovery from ongoing tax credit awards or reducing the amount collected for people affected by coronavirus.

When a person claims Universal Credit, any outstanding tax credit overpayments will be transferred from HMRC to DWP. This includes any overpayments where claimants have already agreed time to pay arrangements with HMRC. DWP can recover tax credit overpayment debts automatically from Universal Credit awards and will also consider separate time to pay arrangements. Due to the coronavirus pandemic, DWP suspended recovery of tax credit debts from UC awards for a period and HMRC temporarily stopped sending old tax credit debts to DWP for recovery. However, HMRC started to send tax credit debts to DWP for recovery once again from end October 2020.

Coronavirus grants and payments

Since the coronavirus pandemic started, there have been hundreds of coronavirus related grants and payments paid out by UK government, devolved governments (in Scotland, Wales and Northern Ireland) and Local Authorities. Some of these payments count as income for tax credits, some are disregarded.

⚠️ If tax credit claimants have received any coronavirus related payments they must check – for each different payment:

Although tax credit rules usually follow the tax rules, so if a payment is taxable then it is likely to be income for tax credit purposes, there are exceptions to this rule and so claimants should not assume that if it is taxable it counts as income for tax credit purposes.

Our current understanding is that the following grants count as income for tax credit purposes:

Self-employment Income Support Grant (SEISS)

We have published some detailed guidance on the LITRG website on how to declare SEISS grants on your tax return. For self-employed individuals the first 3 SEISS grants are taxable in the 2020/21 tax year, no matter what accounting period is used This means they will be counted as income for tax credits in the 2020/21 tax year. Grants 4 and 5 will be taxed in the tax year they are received, which should be 2021/22 tax year and therefore will count as income for tax credits in 2021/22 tax year.

There are special rules on how the grant is taxed and how to declare SEISS granst on a tax return if the claimant is an individual partner in a partnership - depending on whether the grant was paid into the partnership and treated as partnership income or whether the claimant received it as an individual partner.

For tax credits, care needs to be taken not to double count SEISS grants. As explained in more detail in the LITRG website article, SEISS grants will be included in your taxable profit figure. Usually for tax credits, a figure is taken from a certain box on the tax return – depending on which return is completed (although there are some different rules if averaging as a farmer or creative artist is involved):

If a tax credit claimant wants to use the trading allowance, it cannot be used against SEISS grant income for tax purposes (or tax credit purposes) – see our LITRG guidance  for more information.

Where a SEISS grant has been paid for the wrong amount or where the individual was not entitled to it, it may need to be repaid to HMRC. Where a tax credit claimant needs to repay part or all of a SEISS grant it can affect their tax credit award.

If the SEISS grant is repaid in the same tax year in which it was received, the claimant’s self-assessment return should read as though the SEISS grant did not exist and the income for tax credits should be unaffected. The same applies if the grant is repaid at any point before the claimant completes their tax return (relating to the year in which they received the SEISS grant), providing the tax return is completed on time.

If the tax return is submitted late (after 31 January deadline), then the tax credits award will be finalised on 31 January based on the estimated income already given, which is likely to include the incorrect SEISS amount. HMRC do not normally re-visit finalised awards at a claimants request due to submitting their tax return late but claimants in this situation would need to contact HMRC to discuss the position.

If the SEISS grant is repaid after the claimant submits their self-assessment return, the claimant will then need to amend their self-assessment return for tax purposes to take account of the adjustment. In this scenario, the tax credit award is likely to have been finalised using an income figure which includes an incorrect SEISS amount and the claimant will need contact HMRC’s tax credit helpline to update their adjusted tax credit income figure. HMRC have confirmed to us that they may re-finalise the tax credit award using the adjusted income figure (using powers under s19 and/or s20 of the Tax Credits Act 2002).

Small business grants and hospitality and leisure grants

These grants were paid by local authorities.

If self-employed, then the payments will form part of taxable trading income on their tax return following normal accounting rules. If they have reported the grants correctly on their tax return (usually box 10 on the self-employment (short) pages and box 16 on the self-employment (full) pages), then they should use the boxes detailed above for SEISS, as that will ensure the grants flow through as income into the correct year for tax credits.

Coronavirus job retention scheme

If a self-employed tax credit claimant received payments from the job retention scheme to help with their employee’s wages, then these payments will form part of their taxable trading income on their tax return following normal accounting rules. If they have reported the grants correctly on their tax return, (usually box 10 on the self-employment (short) pages and box 16 on the self-employment (full) pages) then they should use the boxes detailed above for SEISS, as that will ensure the grants flow through as income into the correct year for tax credits.

⚠️ NOTE: Employees who were furloughed under the job retention scheme should declare their employed income from their P60 in the usual way. JRS payments were made to employers not employees and employers used those payments for wages/salary expenditure for their employees. So, employees did not directly receive job retention scheme payments themselves but instead they received partial or full wage/salary payments from their employer.

Also, individuals who received a JRS grant to pay an employee – for example a nanny then do not need to declare this grant for tax credits as it is not taxable.

Bonus payment to health and social care staff

The following payments were made to certain health and social care staff:

Our understanding is that these payments were made through the payroll and are therefore subject to tax and NI. They also count as income for tax credits. However, care must be taken not to double-count them. They will already be included in the claimant’s P60 figure and if HMRC have used data from the tax system to show their income on the renewal notice, the bonus should already be included.

Enhanced statutory sick pay scheme – Wales only

This scheme is only available in Wales. Our understanding is the enhanced sick pay payments were/are made through the payroll and are therefore subject to tax and NI because they are treated as any other earnings. They also count as income for tax credits. However, care must be taken not to double-count them. They will already be included in the claimant’s P60 figure and if HMRC have used data from the tax system to show their income on the renewal notice, the bonus should already be included.

Other coronavirus support payments

We have listed below the coronavirus payments that are disregarded as income for tax credit purposes in the legislation.

However, there are likely hundreds of different coronavirus related payments. If not specifically excluded, the payments may count as miscellaneous income for tax credit purposes unless they were received as part of the claimant’s self-employed trade in which case they may count trading income. All other coronavirus related payments should be carefully checked with HMRC.

The following coronavirus related payments are not counted as income for tax credit purposes:

HMRC have published some information on the GOV.UK website. Please note, however, this information appears to only list some payments that should be taken into account but it does not explain how to take the payments into account. If you are unsure about where to include a payment for tax credits, we recommend you contact HMRC directly to check with them.

Transitioning to UC

Before the coronavirus pandemic, DWP and HMRC planned to move all tax credit claimants to UC between November 2020 and September 2024. Tax credit claimants who have reached state pension credit age will be moved to pension credit (this includes couples where both claimants have reached state pension credit age).

The move to UC for working age tax credit claimants was supposed to follow from a pilot which started in 2019. However, the pilot was suspended due to the coronavirus pandemic.

The only way existing tax credit claimants can move to UC now is if:

People who move to UC in any of these three ways are treated as ‘naturally migrating’ and will not qualify for transitional protection which will be available to those who are moved to UC under the managed migration exercise by DWP/HMRC. Our UC section has more information.

£500 one-off payment

The temporary £20 a week increase to the basic element of WTC, introduced as a coronavirus support measure, ended on 5 April. Instead, WTC claimants with a positive tax credit award were paid a separate one-off payment of £500.00 intended to cover the period from 6 April to 30 September 2021. Claimants did not need to claim this payment as HMRC identified all those eligible and all payments were paid by 23 April 2021. A further direction was published to extend the £500 payment to a further group of people following finalisation of their awards. These payments were made from September 2021 depending when the claimant’s award was finalised. This was not a payment of tax credits or part of a tax credit award, it was an entirely separate coronavirus support scheme.

We have produced an FAQ page which explains the £500 payment in more detail.

Last reviewed/updated 11 July 2022