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 for 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. There will be no change to 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 placed on unpaid leave. 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) until the Job Retention Scheme closes.||
You do not need to tell HMRC about any temporary lay-off 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.
|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 will continue to pay the childcare element for four weeks.
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, 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.
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 raised a number of questions with HMRC and will provide a further update when received.
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.
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”.
Due to the coronavirus pandemic, HMRC decided to automatically renew the majority of tax credit claims this year. 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.
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 will have had their claims auto-renewed this year, HMRC will treat 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 will allow self-employed claimants to provide a final figure 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.
Due to a combination of factors, some people who would usually provide an estimate of their income during the renewals process may not be aware that HMRC have treated their income figure as actual when they finalised the 2019-2020 award. Unless claimants contact HMRC before 31 January 2021 to tell HMRC the income was only an estimate or to provide their actual income figure, HMRC will not know and will not make another decision about their award. HMRC are aware that some claimants may still not be able to provide their actual income figure by the 31 January deadline. Where their award has been finalised using estimated income, for this year, HRMC will accept late figures from claimants if they contact HMRC and the reason for missing the deadline was due to the coronavirus pandemic. Where HMRC treated a claimant’s income as if it was actual income in July and who didn’t notify HMRC that it should have been estimated income, those claimants should still contact HMRC as soon as possible to ask for their correct income figure to be accepted but if HMRC refuse, they will need to rely on late appeal rights to challenge the original final decision from last summer.
Although DWP suspended recovery of debts from UC, 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 and HMRC stopped sending old tax credit debts to DWP for recovery. However, HMRC will start to send tax credit debts to DWP for recovery once again from end October 2020.
The Government have introduced several payments and grants related to coronavirus. Some of these will count as income for tax credits, others will not.
Our current understanding is that the following grants count as income for tax credit purposes:
- Self-employment Income Support Grant (SEISS)
- Small Business grant
- Hospitality and Leisure grants
- Payments to self-employed tax credit claimants from the Coronavirus Job Retention Scheme to help pay employees wages and the Job Retention Scheme £1000 bonus
- Payments to self-employed tax credit claimants from the Job Support Scheme to help pay employees wages
- Coronavirus discretionary grants paid by Local Authorities
The following payments are not counted as income for tax credit purposes:
School meals vouchers
- Payments in connection with emergency volunteering leave under the Coronavirus Act 2020
- Any payment made under the scheme known as the NHS Test and Trace Self-Isolation Payment Scheme established on 1st September 2020, or
- the scheme known as the Test and Trace Support Payment scheme established on 28th September 2020 in respect of England,or
- any other scheme established in any part 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
Over the last few months there have been a lot of other coronavirus related payments. We will be providing further guidance shortly about the specific tax credit position of the various payments.
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 their income has fallen and 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.
In the Budget on 3 March 2021, the Chancellor confirmed that the temporary uplift in the rate of the WTC basic element that was in place for 2020/2021 would not be extended. Instead, WTC claimants with a positive tax credit award will be paid a separate one-off payment of £500.00. Claimants do not need to claim these payments as HMRC will identify all those eligible and all payments are scheduled to be 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.
Last reviewed/updated 5 March 2021