Tax credits: Tax credits and coronavirus
There have been several changes to tax credit rules as a result of the coronavirus pandemic. This page sets out all the changes and explains them in further detail.
- Work changes
- 30-hour element
- Childcare element
- Time limit for reporting changes of circumstances
- Renewal changes
- Tax credit debts
- Coronavirus grants and payments
- Transitioning to UC
- £500 one-off payment
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 have introduced special rules to allow temporary changes due to coronavirus to working hours to be effectively ignored for WTC purposes. This means HMRC will treat 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 apply until the end of the Coronavirus Job Retention Scheme (CJRS) (even if the claimant did not benefit from support under that scheme). The CJRS was initially set to end from 31 October 2020 but has been extended to remain in place until 30 September 2021.
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.
The rules outlined in the table below apply until the end of the Job Retention Scheme (currently scheduled for 30 September 2021). WTC claimants do not need to be receiving support via their employer from the Job Retention Scheme to benefit from these special rules as long as the change to their working hours is temporary and as a result of coronavirus.
From 14 January 2021, new legislation introduced a number of run-on payments for working tax credit for people covered by these temporary coronavirus work provisions. The changes are extremely complex and we are currently clarifying aspects of them with HMRC before publishing further information.
|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 work 32 hours a week but have been reduced to 12 hours a week due to the coronavirus crisis. Your employer might be claiming part of your wages through the Job Retention Scheme.||HMRC will treat you as continuing to work your normal hours (those before the reduction) until the Job Retention Scheme closes. Theis will not affect your working tax credit entitlement during that period.||
You do not need to tell HMRC about any temporary reduction because of the coronavirus until the Job Retention Scheme closes.
|Permanent reduction in hours: For example, you usually work 35 hours a week, but your employer reduces your hours to 20 permanently.||Your normal hours will change for working tax credit. Depending on how your hours change you may get less working tax credit, or you may no longer qualify for working tax credit. If you no longer qualify, you may get a four-week run-on of working tax credit.||You need to tell HMRC as soon as the change to your hours becomes permanent. You can do this via the online service or via the tax credits helpline.|
Temporarily laid-off/Furloughed: This means your employer does not have enough work for you but intends to recall you when work becomes available again.This includes people who are ‘furloughed’ where you agree with your employer to vary your contract, so you are not actually doing any work for your employer or working less than normal. Your employer may be claiming part of your wages through the Job Retention Scheme.
|Due to the current Coronavirus crisis, HMRC will treat you as continuing to work your normal hours (those before the temporary lay-off or furlough) until the Job Retention Scheme closes.||
You do not need to tell HMRC about any temporary lay-off or if you are furloughed because of coronavirus until the Job Retention Scheme closes.Note: if the lay-off is made permanent at any point or you are made redundant you must report this change straight away to HMRC.
Unpaid leave: This is where you are still employed but have agreed with your employer that you will take leave that is unpaid. There will not usually be any variation to your contract.This might apply in cases where you cannot work because you have childcare responsibilities due to coronavirus or you are isolating.
|Due to the current coronavirus crisis, HMRC will treat you as continuing to work your normal hours (those before the furlough) until the Job Retention Scheme closes.||You do not need to tell HMRC that you are on unpaid leave temporarily because of the coronavirus until the Job Retention Scheme closes.|
|Self-employed: If your hours reduce or your self-employed work temporarily ceases.||
As long as you are still trading (i.e. you haven’t completely closed down your business) HMRC will treat you as continuing to work your normal hours (those before the reduction due to the coronavirus situation) until the Job Retention Scheme closes.
You do not need to tell HMRC about a temporary change in your hours because of the coronavirus until the Job Retention Scheme closes.
Note: If you cease self-employment completely and don’t intend to continue trading then you will need to report that as a change of circumstances to HMRC when your self-employment ceases.
|Redundancy: You lose your job.||If you no longer qualify for working tax credit, you may qualify for a four-week run-on of tax credits.||
You need to tell HMRC about this change as soon as possible.Note: If you lose your job and get another job within the 4 week run-on period, assuming your new job meets the hours requirements for WTC, you should remain entitled to WTC despite the gap.
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, are only treated as in qualifying remunerative work. They are 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 is furloughed but then goes onto maternity leave will now continue 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 moves 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 is to allow people to end a period of leave and to then benefit from the rules outlined in the table above if their work is affected temporarily due to coronavirus.
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 will continue because HMRC will continue to treat them as working the same hours as immediately before the reduction.
However, HMRC introduced legislation which essentially means you cannot add together hours that someone is treated as working under the special coronavirus rules with any hours that they start to work in another job, in order to newly qualify for the 30 hour element.
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.
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 means that couples with children who did not qualify for the 30 hour element prior to coronavirus but who take on additional work such that they will qualify, are excluded. We have raised the issue with HMRC.
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 are treated as working under the special coronavirus rules outlined above count when considering whether they qualify 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.
There is no need to inform HMRC about temporary changes to working hours due to coronavirus where the special rules for work changes apply. Claimants must tell HMRC if their hours change permanently, they are made redundant or they give up your 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 be reported to HMRC within the usual one month time limit.
From 23 May 2020 until the end of the Job Retention Scheme, 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 are also extended for critical workers. This means that they have 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) 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 means:
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”.
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 have returned to their more usual approach for the 2021 renewals exercise and so more people will receive a reply-required renewal. However, all claimants are urged to check their renewal paperwork correctly, taking note of the instructions around any of the coronavirus concessions in the tax credit rules (eg temporary reductions in working hours) and whether and how to report receipt of coronavirus-related payments.
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 miss the 31 January 2021 deadline to provide their actual income figures, they will consider accepting the actual income figure later is the reason for the delay is related to the coronavirus pandemic. You can read more about this in our blog.
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 are allowing time to pay arrangements, suspending recovery from ongoing tax credit awards or reducing the amount collected for people affected by coronavirus. You can read more about how HMRC deal with tax credit debt in our debt section.
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.
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. We are still working through the various payments and trying to clarify the position for tax, national insurance, tax credits and universal credit, so please do check back on this page.
⚠️ If tax credit claimants have received any coronavirus related payments they must check – for each different payment:
- Whether the payment counts as income for tax credit purposes or can be disregarded
- If it does count as income, how it should be declared for tax credit purposes. Some of these payments may already be included in their P60 income figure so they must check carefully.
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):
- Individuals who complete the self-employment (short) pages – they will usually declare the figure in box 28 + any figure in box 30 as self-employed income for tax credits. If they have correctly declared the SEISS grant on their tax return, it will already be included in the box 28 figure.
- Individuals who complete the self-employment (full) pages – they will usually use the figure in box 73 plus any figure in box 75 for tax credit purposes. If they have correctly declared their SEISS grant on their tax return, it will already be included in the box 73 figure.
- In a partnership and received the grant as an individual partner - then they will usually use the figure in box 16 of the partnership supplementary pages (both short and full) + any figure in box 19 as self-employed income for tax credits. If they have correctly declared the SEISS grants on their tax return, it will already be included in the box 16 figure.
- In a partnership and the SEISS grant(s) was paid to the partnership and distributed to partners based on the partnership agreement - then the SEISS grant will be declared as part of the partnership’s turnover on the partnership return. This will mean the tax credit claimant’s share of it will be taken across to their own partnership tax return supplementary pages as taxable income. They will usually use the figure in box 16 of the partnership return (both short and full) + any figure in box 19 as their self-employed income for tax credits. If they have correctly declared the SEISS grant on their tax return, it will already be included in the box 16 figure.
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.
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:
- Scottish £500 payment for health and social care staff
- Wales – £735 payment for social care workers and an earlier £500 payment for care home and domiciliary workers
- Northern Ireland – HSC staff recognition payment £735
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:
- Payments, in cash or vouchers, in lieu of free school meals.
- Payments in connection with emergency volunteering leave under the Coronavirus Act 2020.
- Any payment made under the NHS Test and Trace Self-Isolation Payment Scheme established on 1 September 2020, or the Test and Trace Support Payment Scheme established on 28th September 2020 in England. Payments from schemes in other parts of the UK for the purpose of providing financial support to people who are required to self-isolate due to coronavirus and cannot work from home are also disregarded as income. However, these payments are taxable, but not subject to national insurance.
- Any payment made under the Covid Winter Grant Scheme (England) or any other scheme in Northern Ireland, Scotland or Wales for the purpose of providing financial support to families and vulnerable individuals to assist with the cost of food and utilities over the same period. The Covid Winter Grant scheme should not be confused with some winter business grants that were paid by some local authorities.
- The £500 payment made to certain working households in receipt of tax credits.
- Payments made under the NHS and Social Care Coronavirus Life Assurance Scheme are not counted as income, instead they are capital (and so only any interest will potentially count as income for tax credits).
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.
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 and currently the move to UC (or managed migration as it is technically known) for existing tax credit claimants is on hold.
The only way existing tax credit claimants can move to UC now is if:
- They choose to claim UC – some people are better off on UC compared to tax credits, others are worse off. It is important to seek advice from a welfare rights specialist before making a claim for UC – once they claim UC, tax credits will end and they may not be able to reclaim them even if they are not entitled to UC
- They need to claim another benefit that UC has replaced – for example if they need help with rent. In that case, most people will need to claim UC which will end tax credits.
- They have a change of circumstances which ends their tax credit claim and none of the exceptions apply that would allow them to make a new claim for tax credits. This might happen if they separate from a partner or move in with a partner or they claim working tax credit only and are made redundant.
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.
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 will be 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. This is not a payment of tax credits or part of a tax credit award, it is an entirely separate coronavirus support scheme.
We have produced an FAQ page about the payment on the LITRG website which provides more detail about entitlement.
Last reviewed/updated 6 July 2021