Tax Credits: Notional income
Under section 7(9) of the Tax Credits Act 2002, HMRC can treat a person:
- as having income which he does not in fact have; or
- as not having income which he does in fact have.
The intention is to prevent people from manipulating their income to claim more tax credit than they would otherwise be entitled to.
There are four categories of notional income:
- Certain sums deemed to be income for income tax purposes. In the tax system, there are so-called anti-avoidance rules which aim to prevent people manipulating their income in order to pay less tax.
- Income claimants have deprived themselves of in order to claim/increase entitlement to tax credits (known in social security shorthand as income deprivation).
- Income which would be available to claimants if they applied for it.
- A reasonable rate of pay where work is done at less than the going rate, and the recipient of the service can afford to pay it. This does not apply to volunteers working free of charge for a charitable or voluntary organisation.
Sums deemed to be income for income tax
Certain sums which are deemed to be income for income tax purposes in order to counter tax avoidance are also to be taken into account for tax credits purposes.
These sums are the amounts charged to income tax under the following tax provisions:
- the Taxes Act section 714 (transfers of securities: treatment of deemed sums and relief’s) or 716 (transfer of unrealised interest) subject to amendments;
- the Taxes Act section 730 (transfers of income arising from securities);
- the Taxes Act section 761 (charge to income tax of offshore income gain);
- lease premiums treated as rent under ITTOIA 2005, sections 277 to 283;
- stock dividends from UK resident companies (ITTOIA 2005, Part 4, Chapter 5);
- release of loan to participator in close company (ITTOIA 2005, Part 4, Chapter 6);
- charge to tax on profits from deeply discounted securities (ITTOIA 2005, section 427);
- transactions in deposits (ITTOIA 2005, Part 4, Chapter 11);
- income from trusts and settlements where the settlor has retained an interest and the income is therefore treated as income of the settlor (ITTOIA 2005, sections 624 to 628);
- income from trusts and settlements where the beneficiary is the settlor’s unmarried child or children and the income is therefore treated as income of the settlor (ITTOIA 2005, sections 629 to 632);
- capital sums paid to settlor by trustees of settlement (ITTOIA 2005, section 633);
- capital sums paid to settlor by body connected with settlement (ITTOIA 2005, section 641);
- income treated as arising from a person’s absolute or limited interest in the residue of an estate (ITTOIA 2005, section 652; sections 654, 655);
- price differences under repos (ITA 2007, part 11, Chapter 5);
- transfers of assets abroad (ITA 2007, Part 13, Chapter 2);
- transactions in land (ITA 2007, Part 13, Chapter 3);
- income tax charge under the pre-owned assets legislation (FA 2004, section 84 and Schedule 15).
See also page 16 of the TC600 guidance notes (please note these guidance notes have not been updated since April 2019).
Income deprivation
If a claimant deprives themselves of income for the purpose of securing entitlement to, or increasing the amount of, a tax credit, the claimant can be treated as still having that income.
It should be noted that the restriction should only apply where the claimant deprives themselves of income for the purpose of securing entitlement to, or increasing the amount of, a tax credit.
So, a company director who waives a dividend in order to retain the profits within the company to aid future growth ought not to be caught by this provision. However, if the same director waived the dividend solely in order to increase their tax credit entitlement, the amount of the dividend may be treated as the director’s notional income.
The Tax Credits Technical Manual (TCTM 04803) states:
“the claimant may have more than one reason for disposing of income, only one of which is to obtain tax credit or more tax credit. Securing or increasing entitlement to tax credit may not be a claimant's main motive, but it must be a significant one.” [italics supplied.]
Thus a carer who stopped claiming carer’s allowance so that the person in their care, who was not a member of the carer’s family, could claim the severe disability premium in income support, was held not to have notional income by the equivalent social security provision (CIS/15052/1966).
Income available on making of a claim
If income would be available to a claimant on making an application for it, the claimant is treated as having that income.
There are exceptions:
- income from a personal injury trust;
- interest on damages for personal injury, or periodical payments of personal injury damages (e.g. under a structured settlement);
- a rehabilitation allowance under the Employment and Training Act 1973;
- income from a personal pension scheme or a retirement annuity contract;
- deferred state retirement pension.
Claimants providing services to others for less than full rate of pay
If a claimant provides a service to someone, and
- that person makes no payment, or pays less than that paid for a comparable employment or self-employment in the area, and
- HMRC are satisfied they have sufficient means to pay for the service, or pay more for it,
the claimant is treated as having as much employment income, or trading income, as is considered reasonable for that service.
There are exceptions:
- the claimant is a volunteer, or is engaged to provide the service by a charitable or voluntary organisation, and HMRC are satisfied that it is reasonable for the claimant to provide the service free of charge; or
- the claimant provides the service while taking part in a Government approved employment or training programme.
Last reviewed/updated 1 July 2022