£500 payment for working households on tax credits

This page explains more about the £500 one-off payment for certain working households receiving tax credits announced in the March 2021 Budget and the further extension announced in September 2021. This payment was part of the Government’s coronavirus response measures. The conditions for the original payment are set out in a Treasury Direction made under Section 76 Coronavirus Act 2020 and the extension in a further direction.

Although the payment was made some time ago, we have retained this page in the event that advisers have any questions about the conditions of the payment.

Why was this payment introduced?
Is this payment part of tax credits?
Is this payment for the 2021-22 tax year?
Does a claim need to be made for the payment?
When will the payment be made?
Who qualified for the original payment?
Who qualifies for a payment under the extension rules?
Fraudulent claims
What happens if there is a change of circumstances or a change in income after the payment is received?
Does each member of a couple receive a payment?
How will claimants know a payment has been made?
What if no payment is received?
Does the payment need to be declared as income for other benefits?
Is the payment taxable?
Can an overpayment of tax credits be recovered from the payment?
Can HMRC seek recovery of the payment?
Further information

 Why was this payment introduced?

In March 2020, as part of a package of measures in response to the coronavirus pandemic the Government announced that they would increase the basic element of Working Tax Credit (WTC) for the 2020-21 tax year by an additional £20 a week. The basic element of WTC was originally intended to be £1,995 in 2020-21 but was increased to £3,040.

A similar £20 per week temporary increase was made to universal credit (UC). The increase to WTC (and UC) was scheduled to end on 5 April 2021.

In the March 2021 Budget, the Government confirmed that they would extend the UC temporary increase of £20 a week until the end of September 2021 – a 6- month extension. However, WTC is not a weekly or monthly benefit like UC, so it is not possible to pay an increase (equivalent to £20 a week in UC) for only 6 months of the tax year for WTC. Instead, the Government announced this one-off payment of £500 to provide extra support when the temporary increase in WTC ends on 5 April 2021.

The original payment was based on the award in place on 2 March 2021, changes after that date were not taken into account. This meant, as explained further below, some people were not entitled to the payment even though once their award was finalised they would have met the relevant conditions on 2 March 2021. As a result, the scheme was extended in September 2021 and a further direction published.

Is this payment part of tax credits?

No. It is an entirely independent, separate one-off payment. Although qualification is based on qualification for tax credits, it is not a payment of tax credits.

Is this payment for the 2021-22 tax year?

The explanatory notes to the current Finance Bill state that the payment is being made to cover a six-month period from April to September 2021 to continue Government support. Although the payment will provide extra support from April 2021 it is important to be aware that entitlement to it is based on an award of tax credits on 2 March 2021 (ie, in the 2020-21 tax year). It is not based on income and circumstances after 6 April 2021.

This means that some people who may not be receiving any tax credits from 6 April 2021 may qualify for the payment but others, who will receive tax credit payments from 6 April 2021, but did not before that date, will not qualify for the payment. Illustrative examples of how this happens are shown below.

Does a claim need to be made for the payment?

No, HMRC will make the payment automatically to those who qualify.

When will the payment be made?

Under the original direction, HMRC must make a payment as soon as reasonably practicable in the 2021-22 tax year. HMRC made all payments under the original direction by 23 April 20201. HMRC sent text messages to claimants who they hold contact details for.

Under the extension direction, HMRC must make a payment before the end of the 2022-23 tax year. As qualification under the extension is based on finalised awards, HMRC cannot make a payment until a final decision is made for 2020-21. HMRC say they will make payments in September 2021.

Payments are made automatically into the same bank account used for tax credits. If in receipt of CTC, it will be the bank account that the CTC is paid into that is used.

Who qualified for the original payment?

To qualify there must have been, on 2 March 2021 –

Note that there must be a current award on 2 March 2021 – not an actual payment of tax credits on that date

‘Current award’

A current award of tax credits means an award in place on 2 March which has not, before 2 March, been terminated or become not payable under various fraud provisions.

Termination includes awards terminated by HMRC (under Section 16 Tax Credit Act 2002), those terminated because a claim has been made to UC or those terminated because of a claim made for Tax-Free Childcare.

Terminations which are actioned on or after 2 March, but cover a period before 2 March, do not disqualify someone from payment. For example, if someone in receipt of WTC and CTC reports on 20 March that they have moved in with a new partner from 20 February, although their tax credit claim will be terminated from 20 February this will not affect entitlement to the one-off payment. If they reported the change before 2 March, such that their award was terminated before 2 March, they would not get the payment.

Nil tax credit awards

It is possible to be awarded working tax credit (or child tax credit) at a nil rate. This means that a claim has been made, the various hours and age requirements to have at least the basic working tax credit element included in the calculation are met, but household income is high enough to reduce the amount of the award to nil.

Tax credits are calculated by adding up all of the elements a person qualifies for and then reducing those elements by 41p for every £1 of income over the relevant threshold (£6,530 for 2020/21).  This means that:

The following table shows some different scenarios and indicates whether they will receive the orignal payment (see below for payments under the extended rules):

Scenario

Explanation

Payment

WTC only claim covering 2 March 2021 – receiving payments of WTC

There is a current award of WTC at an amount higher than NIL on 2 March 2021.

 

As explained below, even if the claimant reports a lower income when HMRC come to finalise their award for 2020/21 which means they are entitled to an amount of WTC for that period, they will not qualify for the one-off payment because there was no award in place on 2 March 2021.

YES

WTC only claim covering 2 March 2021 – nil award

 

There is a current award of WTC on 2 March 2021, because the person has been awarded WTC, but the award is at a nil rate.

NO, but may qualify under extension.

WTC and CTC claim covering 2 March 2021 – receiving payments of WTC and CTC

There is a current award of WTC at an amount higher than NIL on 2 March 2021.

YES

WTC and CTC claim covering 2 March 2021 – receiving payments of CTC only

There is a current award of WTC at a nil rate and a current award of CTC at an amount higher than Nil

YES

WTC and CTC claim covering 2 March 2021 – nil award for both WTC and CTC

There is a current award of WTC on 2 March 2021, but the award is at a nil rate. CTC is also at a nil rate.

NO, but may qualify under extension.

CTC only claim covering 2 March 2021 – receiving payments of CTC only

There is no current award of WTC on 2 March 2021.

 

If there is award of WTC, because a claimant does not meet the age and hours requirements, then the claim is a CTC only award. Some claimants believe they are not entitled to WTC because they do not receive payments – but they must check their award notices carefully because it is possible to be awarded WTC but not receive payments as explained above.

NO

WTC only or WTC and CTC award covering 2 March 2021 – no payments being made

Sometimes, HMRC will stop payments of tax credits if the person has already received their full award for the year following the report of a change of circumstances or increase in income.

 

They still have a current award of WTC or WTC and CTC even though they may no longer be receiving payments.

 

HMRC refer to this as CPAC (ceasing payment after change).

YES

Positive WTC only or WTC and CTC award from 6 April 2020 which is subsequently terminated by HMRC before 2 March (eg following  compliance investigation or following a claim to UC or TFC.

As the claim was terminated before 2 March, even though earlier in the year there was initially an award, they do not qualify for the payment.

NO

WTC only or WTC and CTC award covering 2 March 2021 – terminated on 10 March 2021 effective 1 March 2021

As the claim was terminated on or after 2 March, even though it takes effect before that date, they qualify for the payment

YES

WTC only or WTC and CTC award initially awarded for 2020/21, revised to a nil rate of payment (for the whole year) before 2 March following a change of circumstances or change in income.  

 

There must be a current award of tax credits on 2 March. An earlier award, even if covering the period of 2 March, that is subsequently revised, is not enough to qualify for the payment. So where an award is revised before 2 March, so that it is nil from the start of the year, there will be no eligibility for the payment.

 

(Note: see above where a change leads to an award being revised before 2 March so that there is still an overall positive award for the year which has been reduced to a nil rate of pay for the remainder of the year. This is referred to by HMRC as CPAC and in that case the one-off payment would be made)

NO, but may qualify under extension.

Who qualifies for a payment under the extension rules?

Those who did not qualify for a payment under the original direction but who, for a period that includes 2 March 2021, are entitled under a final decision to:

will receive the one-off £500 payment.

This extension was introduced to address some of the unfairness that existed under the original direction for those who had not yet report their actual income to HMRC (income changes do not need to be reported when they happen for tax credits) but who would have qualified had they done so earlier in the year. It may also benefit those who reported a change of circumstances after 2 March which affected their entitlement to WTC on or before 2 March. See below for some examples of how this works.

Fraudulent claims

Even if the conditions above are met, the Treasury Direction states that a person is not a qualifying person they, or their partner if a joint claim, received a current award of tax credits as a result of knowingly being concerned in fraudulent activity undertaken with a view to obtaining that award or a support payment.

‘Knowingly being concerned in fraudulent activity’ does not appear to be defined specifically, although it reflects the terminology in s35 of the Tax Credits Act 2002.

What happens if there is a change of circumstances or a change in income after the payment is received?

It is possible that changes of circumstances or changes to income, reported after 2 March 2021, will impact the award in place on 2 March 2021.

Under the original direction, entitlement for this one-off payment was based on a snap-shot of the tax credit award in place on 2 March 2021. Any changes after that date, even if they impact an earlier period do not affect entitlement to the payment. HMRC will not be able to seek recovery in these situations.

However, entitlement was extended in September 2021 to those who did not receive a payment under the original direction but would have done so had their award been finalised.

Example

Roger is a single WTC claimant. His income in 2019/20 was £15,000 and his award for 2020/21 is based on his previous year income of £15,000. Although awarded WTC, his award is nil due to the level of his income. Roger is self-employed and due to COVID is unsure what his income will be for 2020/21 and decides to wait until renewal time when he can confirm his actual income. In June 2021, he reports his 2020/21 income as £7,000.

Under the original direction, Roger is not entitled to the one-off payment because he had a nil award on 2 March 2021.

Under the extension rules introduced in September 2021, Roger will be entitled to the one-off payment once his 2020-21 award is finalised.

Example

Sierra is a single WTC claimant. Her income in 2019/20 was £8,000 and her award for 2020/21 is based on her previous year income of £8,000. Sierra receives payments of WTC due to her low income. However, Sierra’s business does better than expected in 2020/21 and she declares her actual income for 2020/21 in June 2021 as £18,000. At renewal, her WTC award for 2020/21 is reduced to nil and she will have been overpaid.

Sierra is entitled to the one-off payment because she had a current WTC award, at a rate higher than nil, on 2 March 2021. The fact that her final award reduced her WTC amount to Nil does not change her qualification for the payment. She will not need to repay the one-off payment. 

Example

Luke is a single parent. He claims WTC (he works 25 hours a week) and CTC (for his two children). On 10 March, Luke moves in with his new partner. He phones HMRC to tell them and his tax credits are stopped.

Luke is entitled to the £500 payment as he had a relevant award in place on 2 March.

If Luke had moved in with his partner on 20 February, and informed HMRC on 10 March, he would still be entitled to receive the payment because a termination on or after 2 March which affects the period before 2 March does not affect qualification for the payment.

Does each member of a couple receive a payment?

Couples will only receive one £500 payment between them.

HMRC will make the payment into the account of the person receiving WTC (if it is a WTC only claim). Where the claim is for both WTC and CTC – payment will be made to the bank account of the person receiving the CTC.

How will claimants know a payment has been made?

HMRC wrote to all those eligible for the original payment.

The one-off payment will not be shown in the tax credits part of the personal tax account. However it should show in their bank account with the reference ‘HMRC C19 Support’.

What if no payment is received?

If a claimant thinks they should have received a payment, or if HMRC have told them they should receive a payment, and it has not been received by the end of April (or after their award has been finalised if they qualify under the extension rules), they should contact HMRC via the tax credits helpline on 0300 300 3900. HMRC advise not to contact them before the end of April until all payments have been made.

Does the payment need to be declared as income for other benefits?

No, HMRC say that it does not need to be declared for tax credit renewals nor will it affect any other benefits that they may receive.

Is the payment taxable?

The payment is not subject to national insurance or income tax.

Can an overpayment of tax credits be recovered from the payment?

No, as it is not a payment of tax credits, HMRC do not have any power to recover overpayments against it.

Can HMRC seek recovery of the payment?

Yes, but only in limited circumstances. The Finance Bill contains a provision for a tax charge, equivalent to the payment, which applies if someone has received a £500 payment that they were not entitled to.

As HMRC are making the payment automatically, without the individual making a claim for it, it is theoretically possible that they could make a payment to someone who doesn’t meet the qualifying criteria. We are seeking clarification on whether the tax charge would apply in this situation.

Under the Treasury Direction, a person is not a qualifying person if they, or their partner if part of a joint claim, received a current award of tax credits as a result of knowingly being concerned in fraudulent activity undertaken with a view to obtaining that award or a support payment. Where a payment has been made to such a person, the tax charge will apply.

Further information

HMRC have published information about the payment on GOV.UK.

Last reviewed/updated 25 January 2022