Tax Credits: Notional income

Under section 7(9) of the Tax Credits Act 2002, HMRC can treat a person:

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:

  1. 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.
  2. Income claimants have deprived themselves of in order to claim/increase entitlement to tax credits (known in social security shorthand as income deprivation).
  3. Income which would be available to claimants if they applied for it.
  4. 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:

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:

Claimants providing services to others for less than full rate of pay

If a claimant provides a service to someone, and

  1. that person makes no payment, or pays less than that paid for a comparable employment or self-employment in the area, and
  2. 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:

Last reviewed/updated 1 July 2022