Tax Credits: Other changes
Some changes of circumstances must be notified to HMRC within a specific time period. If this is not done, as well as an overpayment, claimants may be faced with a penalty for failure to notify the change. These changes are set out in the changes that must be reported section.
Other changes leave claimants with a choice about whether or not to inform HMRC when they happen or wait until the end of the year.
It is advisable to report all changes which increase entitlement within one month in order to secure the higher credits, as increases in awards can only be backdated by up to one month in most cases. The backdating period for changes of circumstances was reduced from three months to one month from 6 April 2012. (The only exception to this is for the disability element where in certain circumstances longer backdating can be given). There would be no other penalty if the change was notified more than one month later - there would just be the loss of credits that might have been due for the period before the one-month backdating time limit. There was a temporary exception for critical workers during the coronavirus pandemic until 30 September 2021 which extended the usual one month to three months. See our tax credits and coronavirus page for more information.
Changes of circumstances which decrease entitlement are backdated to the date of change and will often result in an overpayment of tax credits.
There is no legal obligation to report changes in income when they happen, although they must be reported accurately on the annual declaration which is sent to claimants after the end of the tax year.
Deciding when to report changes of income (either when the change happens or after the end of the tax year) can have consequences not only for tax credits, but also for other benefits such as Housing Benefit.
In 2022/2023, if income goes up by no more than £2,500 ('the disregard') over the level of income for the previous tax year, there is no immediate effect on tax credit entitlement. The disregard for 2015/16, 2014/15 and 2013/14 was £5,000 and in 2012/2013 and 2011/2012 was £10,000. For 2010/2011, 2009/2010, 2008/2009, 2007/2008 and 2006/2007 it was £25,000. Prior to 2006/2007 the disregard was only £2,500. If 2021/2022 income is lower than previous year income by not more than £2,500 then tax credits will not be adjusted. Only if the fall is greater than £2,500 will there be any adjustment to tax credits. See Understanding the disregards for more information.
But two points should be borne in mind:
- The disregard only operates during the tax year in which the increase in income happens; tax credits for the following year are based initially on the actual income of the year before; and
- The run-on payments made in the early part of a tax year before a claim is formally renewed for that year (known as 'provisional payments') are based upon the last known income and circumstances of the claimant. So if the claimant has chosen not to tell the Tax Credit Office about their increase in income, it will not be reflected in their provisional award. The consequence could be an overpayment which they will have to repay later in the year when their renewal claim is processed.
Falls in income can be more problematic in terms of deciding whether to tell HMRC when it happens or wait until the renewal process. The advantage of telling HMRC immediately is that if the fall is greater than £2,500 (from 6 April 2012) the award can be amended to be based on this new lower estimated income less £2,500 which will generally mean an increase in tax credits. This can be helpful at a time that a household has suffered a fall in income.
The disadvantage of reporting the fall in income immediately is that the income may not remain at the level for the rest of the year. If the income subsequently rises again before the end of the tax year, it may create an overpayment. A full discussion of this can be found in our Understanding the disregards section. There are also interactions with Housing Benefit and Council Tax Benefit that can make reporting at a certain time more beneficial.
IMPORTANT NOTE: The information given above regarding reporting a fall in income is based on our interpretation of the legislation. In particular, the decision on whether to report an income change in part relies on the fact that if reported at renewal time, any underpayment will be paid to the claimant immediately as required by Section 30 Tax Credits Act 2002. However, the HMRC manual suggests that in practice HMRC may use any such underpayment and offset it against any ‘notional’ overpayment that has occurred in provisional payments of the new tax year. If this happens, the claimant should immediately contact HMRC and ask for the underpayment to be paid to them in full and if this is refused should lodge an appeal against the final award for the year just ended at the same time filing a complaint.
In addition, HMRC will often use income information provided by an employer (RTI) to check whether they are holding the most up to date information for a tax credit award. If the RTI information indicates to HMRC that current year income is likely to increase by more than £2,500 compared to previous year income, they are likely to update their records with a new estimated income for the current year and change the award to reduce the likelihood of an overpayment by the end of the year. See our RTI and tax credits section for more information.
HMRC has the right to require information or evidence to substantiate a claim from a claimant's employer or childcare provider. For this reason any change of employer or childcare provider should always be reported to HMRC even though it may not change the award in any way.
In many cases, adding a child to a claim will increase the maximum rate of the award as a child element will be added for that child. However, from 6 April 2017, the policy of limiting support through tax credits (and indeed, Universal Credit) to a maximum of 2 children was introduced. In tax credits, a child element of child tax credit will continue to be paid for all children born before 6 April 2017 as the 2 child limit rule applies only to children born on or after 6 April 2017 and exceptions apply. You can read more about the 2-child limit in the Entitlement section.
Even if the child element is not payable for a 3rd or subsequent child in a household, it is important that the addition of the child is still reported to HMRC as soon as possible and no later than one month (extended to three months temporarily for critical workers due to the coronavirus pandemic) after it happens to make sure that any other related payments are correctly included. For example, the child disability element of CTC or the childcare element of working tax credit may be payable in respect of the child. These elements are not affected by the 2 child limit policy. In addition, if one of the other children move off the claim, the child not attracting a child element may then move into position for a child element. If they are already on the system, this should happen automatically.
HMRC also require claimants to notify them that an exception to the 2 child limit may apply. If one of the exceptions might apply to a child that is being added to a claim who won’t attract the child element under the new 2 child limit rules, then the claimant should tell HMRC about the potential exception when adding the child/young person to the claim. Where a claimant later tries to claim an exception for a child, backdating will be limited to previous 6 April. Longer backdating will only be given where HMRC determine there was an official error.
Last reviewed/updated 25 April 2022