Tax Credits: Policy
This section of the website gives information about some of HMRC’s current and future tax credits policies with links to further information. This material was written by the Low Incomes Tax Reform Group.
- Changes to the system – Introduction
- Changes in 2010/11 and earlier years
- Changes in 2011/2012
- Lowering the second income threshold
- Main taper rate increased from 39% to 41%
- Family element withdrawal rate increased
- Abolition of the baby element
- WTC for those aged 60 or over
- Childcare element percentage reduced from 80% to 70%
- Decrease in the income disregard
- Up-rating using Consumer Price Index
- Freeze on up-rating of basic and 30 hr WTC elements
- Increase to the child element of CTC above indexation
- Changes in 2012/2013
- Changes in 2013/2014
- Changes in 2014/2015
- Changes in 2015/2016
- Changes in 2016/2017
- Changes in 2017/2018
- Changes in 2018/2019
- Changes in 2019/20
- Changes in 2020/21
Changes to the system – Introduction
A series of fundamental changes to the tax credit system were announced in the June 2010 emergency Budget and the October 2010 Comprehensive Spending Review. Some of these changes were introduced from April 2011, the remainder from April 2012. One final change, the lowering of the disregard for rises in income, commenced in April 2013.
A useful table, summarising the changes and when each began, can be downloaded here.
NB - There have been no announcements of further changes to the tax credits system for 2018/19 and beyond.
Changes in 2010/2011 and earlier years
This policy is operated by Debt Management and Banking in relation to overpayment recovery.
Some people will be paying back two overpayments, one via ongoing recovery and another via direct recovery. This often happens where there is an overpayment on an old claim, and a new overpayment on a current claim. In August 2009, HMRC implemented a new policy which means that any direct recovery action should be suspended until the ongoing recovery ends.
More information about tax credit debt can be found in our dealing with debt section.
This policy is operated by Debt Management and Banking in relation to overpayment recovery.
The law says that an overpayment debt for a couple can be collected by HMRC in full (but only once!) from either the claimant or their partner.
Prior to August 2009, HMRC policy was to allow each party to repay 50% of the overpayment (unless a different split was agreed). However, when confirming this agreement in writing, HMRC reserved the right to return to the partner who was engaging with them for the other 50% if they could not trace the other partner.
Since August 2009, HMRC have implemented a much fairer policy in these situations. As before, provided a person engages with HMRC, they will allow repayment of 50% of the joint debt. Provided that this 50% is paid (either by lump sum or on a payment plan) HMRC will not pursue that person for the remaining 50%. Instead they will pursue the other partner, and if they cannot collect the money will not go back to the engaging partner to collect it.
It is important to note that the law still allows HMRC to pursue either partner for the full amount of the joint debt. Also, this process is not well advertised by HMRC, so you should ensure that you ask Debt Management if you think it applies.
Sometimes, tax credits claimants who form a couple or who become single, either because they separate or because one partner dies, are slow in reporting the change to HMRC. Yet in many cases, if they had acted promptly they would have continued to be entitled to tax credits, albeit in a different capacity.
Prior to 17 May 2007, HMRC had a policy of notional offsetting. This policy was suspended on 17 May 2007 and from then until 18 January 2010, HMRC would recover the whole of any overpayment arising on the old claim, but give no credit for what the claimant would have received had they made a new claim at the right time.
From 18 January 2010, HMRC introduced a new policy which allows tax credits claimants who start to live together, or who become single after being part of a couple, but are late reporting the change to HMRC, can reduce the overpayment on their old claim by whatever they would have been entitled to had they made a new claim promptly.
To request notional offsetting, claimants should contact the tax credit helpline to ask for their case to be referred to the ‘notional offsetting (or notional entitlement)’ team in the Tax Credit Office. Notional offsetting is not available if the failure to report is deliberate. See our understanding couples section for more details.
In 2010-2011 and earlier years, CTC claimants received the full family element (£545) until their income reached ‘the second income threshold’. For most people this was an annual income of £50,000 (although for some it may have been higher).Above that amount the family element was withdrawn at 6.67%, or £1 in each £15 by which income exceeded that figure. Changing the second income threshold to £40,000 in 2011/12 meant that the withdrawal started at lower income levels, and the rate of withdrawal was changed to 41% not 6.67% meaning once it reached the second income threshold it was withdrawn much quicker.
Some families who were receiving the family element of £545 in 2010/11 had their tax credits reduced to Nil from April 2011, whilst other families on higher incomes had a reduction in the amount they received as a result of this change. As explained below, the second income threshold was completely removed from April 2012.
From 6 April 2011, the withdrawal (or ‘taper’) rate increased from 39% to 41%.
The first step in a tax credit calculation is to work out the maximum possible entitlement. This maximum (not including the family and baby elements) was then reduced when household income started to go above certain thresholds. In 2010/2011 it meant that if a claim for working tax credit (WTC) or both WTC and CTC was made, entitlement was progressively reduced by 39p for each £1 by which income goes above £6,420 a year. If the claim was CTC only, that income threshold was £16,190 a year.
The change to the withdrawal rate meant that from 2011/2012, claimants will lose 41p instead of 39p for each £1 of income above those thresholds. The 41% taper remains in place for 2012/2013.
Prior to 6 April 2011, the family element (£545) was protected until income reached at least £50,000 (the second income threshold). Once income reached the second income threshold it was tapered away at a rate of 6.67%.
The 6.67% taper rate gives an income range of approximately £8,170 which is added to the second income threshold (whether it is £50,000 or higher) before the family element disappears completely. Therefore, a family whose second income threshold was £50,000 could continue to get at least some family element until their income reached £58,170.
From 6 April 2011, the taper was increased from 6.67% to 41%. The second income threshold was also lowered so that family element was only protected up to an income of £40,000. With an increase of the taper to 41%, the income range reduced to approximately £1,329. Consequently, in 2011/12, a family with a second income threshold of £40,000 would have had their family element disappear at an income of £41,329.
Families with household income above £40,000 will start to have their family element of £545 a year tapered away from 6 April 2011 at a rate of 41%. The current rate is 6.67%.
The baby element of child tax credit was payable to families with a child under one in addition to the family element (making a total of £1090). This was abolished for all claimants on 6 April 2011, including those families who had received it for less than 12 months.
From 6 April 2011, those aged 60 or over can qualify for working tax credit by working at least 16 hours a week. Previously they were required to work at least 30 hours unless they were responsible for a child or children or qualified for the disability or 50+ elements.
From 6 April 2011, the childcare element will provide help with only 70% of eligible costs as opposed to the current 80%.
Couples who both work at least 16 hours per week (unless one is incapacitated, in prison or hospital) and lone parents who work at least 16 hours per week can claim the childcare element. From 6 April 2006 until 5 April 2011, this element provides help with the costs of registered or approved childcare of up to 80% of the maximum set amounts which was £175 a week for one child (80% of which is £140) and £300 a week for two or more children (80% of which is £240).
From April 2011, claimants will only receive up to 70% of the maximum amounts which means up to £122.50 for one child and up to £210 for two or more children. The childcare element also paid 70% of costs in the early years of the system before increasing to 80% from 6 April 2006.
The tax credit income disregard changed from £25,000 to £10,000 from 6 April 2011 (it has continued to decrease and for 2016/17 is currently £2,500).
The disregard is one of most complex parts of the tax credit system. We explain the disregard in detail in our 'understanding the disregards’ section.
Each year, the rates of tax credits and other benefits are increased. Normally this is in the form of a percentage, linked to the Retail Price Index. However, the change means that from 6 April 2011, the percentage increases will now be decided using the CPI index.
Each April, the elements of tax credits are increased. As explained above, hitherto this has been done by reference to the retail prices index but from April 2011 will be done by reference to the consumer prices index (which has tended to be less generous). From April 2011, the basic and 30 hour elements of WTC will be frozen and will not be up-rated at all for 3 years.
The child elements of CTC (not including the family element) were increased by more than indexation which offset some of the losses caused to families with children from the other changes which affect the taper. As a consequence of changes to the taper rate, the income threshold for people claiming CTC only dropped in 2011-12 to £15,860 and so did the income levels at which CTC was progressively withdrawn. This was the first such fall in CTC entitlement since tax credits were introduced in 2003.
Changes in 2012/2013
Prior to April 2012, the family element of CTC (£545) was protected until income reached the second income threshold. For most people in 2011-2012 this was £40,000. It was then reduced at a rate of 41% for every £1 of income above the second income threshold.
We explain in detail how to the second income threshold was calculated in our ‘calculating tax credits’ section. It may still be necessary to calculate this in overpayment cases.
From 6 April 2012, the second income threshold has been removed and so the family element is no longer protected. Instead, the family element will be reduced at a rate of 41% immediately after all other credits have been withdrawn. This means that some people who received the family element in 2011-2012 may receive nothing in 2012-2013.
The 50+ element of tax credits ceased from 6 April 2012. Prior to that date, people aged 50 or over who returned to work after a period claiming certain benefits, were eligible to claim tax credits by working at least 16 hours a week. They received the 50+ element for one year from when they return to work. The element was removed from all claims on 6 April 2012, even those where the claimant had not received it for a full 12 months.
Prior to 6 April 2012, initial claims for tax credits could be backdated for up to 93 days if the qualifying conditions were met during that period. You can find out more about backdating in our ‘making a claim section’ . Similarly, changes of circumstances could be backdated up to 3 months, claimants of the disability element were given up to 3 months to inform HMRC of an award of a qualifying benefit and asylum seekers were given 3 months to inform HMRC of a grant of refugee status.
From 6 April 2012, maximum backdating periods have been reduced as follows:
Initial claims – 31 days
Changes of circumstances – 1 month
Reporting qualifying benefit for the disability element – 1 month
Reporting grant of refugee status – 1 month
HMRC have always had a power to introduce an income disregard for falls in income, but have never used it. Prior to 6 April 2012, if income fell as compared to the previous year, tax credits were adjusted so that the claimant received an amount based on their new (lower) income. Claimants did not need to wait until the end of the tax year to report a fall in income, they could inform HMRC of an estimated income at any point during the year and tax credits would be revised to be based on this new lower income.
From 6 April 2012, the disregard for falls in income means that tax credits will not be adjusted until income falls by more than £2500 as compared to previous tax year income.
We explain how this disregard works in practice in our ‘understanding the disregards’ section.
As explained above, from April 2011 the basic and 30 hr elements of WTC were frozen for three years. In the 2011 Autumn statement it was announced that from 6 April 2012 the second adult element of tax credits would also be frozen.
The freeze on the second adult element of WTC means that the CTC threshold is also be frozen at £15,860 from April 2012. This is because the CTC threshold is set by calculating the income point at which the basic and second adult elements of WTC are tapered away. 2011-2012 was the first year that the CTC threshold fell since the introduction of tax credits. This was due to the freeze on the basic element of WTC and the increase in taper from 39% to 41%.
Prior to 6 April 2012, couples with children needed to work at least 16 hours per week in order to qualify for tax credits. From April 2012, this was increased to a requirement to work at least 24 hours between them with one person working at least 16 hours a week.
For couples who worked above 16 hours, but under 24 hours in 2011-2012 meant that one person needed to increase their hours to at least 24 per week or the other needed to start working so that their combined hours increased to 24 (but with one partner working at least 16).
Couples with children who qualify for WTC in some other way will not be subject to the new hour requirement. This applies to people who qualify for the disability element of WTC or who are aged 60 or over. Both groups will continue to qualify for WTC by working at least 16 hours.
Couples with children where one person is working at least 16 hours and their partner is:
- incapacitated
- in prison
- in hospital
- entitled to carer’s allowance
will continue to qualify for WTC by working at least 16 hours (i.e. there is no change from the previous criteria).
As explained above, entitlement by one partner in a couple to carer’s allowance exempts them from the new 24 hour rule for couples with children. This exception was announced in the Budget 2012 following a letter sent to Ministers from a coalition of charities led by Low Incomes Tax Reform Group.
The Budget announcement also introduced an exception in the childcare element. Prior to 6 April 2012, couples are required to work at least 16 hours each (combined 32 hours) a week in order to claim help with their childcare costs. The exception to this requirement is where one partner works at least 16 hours a week and the other is incapacitated, in prison or hospital. The Budget announcement means that entitlement to carer’s allowance has been added to the list of exceptions. This means that a couple, where one partner works at least 16 hours a week and the other is entitled to carer’s allowance can claim help with their childcare costs.
It was announced in the June 2010 Budget and the October 2010 Comprehensive Spending Review that the CTC child element would increase by £110 above indexation from 6 April 2012. This planned change was reversed in the Autumn Statement 2011. The CTC element (along with the disability elements of WTC and CTC) increased by CPI of 5.2%.
The tax credit income disregard changed from £25,000 to £10,000 from 6 April 2011. From 6 April 2013, this decreased again from £10,000 to £5,000.
The disregard is one of most complex parts of the tax credit system. We explain the disregard in detail in our ‘understanding the disregards’ section.
The Welfare Reform Act 2012 introduced a loss of tax credits provision into the Tax Credits Act. This means that in certain cases of fraud, working tax credit will be lost for a period of time. You can read the full detail of the change in our fraud section.
Section 28(1) Tax Credit Act 2002 sets out the law on recovery:
‘Where the amount of a tax credit paid for a tax year to a person or persons exceeds the amount of the tax credit to which he is entitled, or they are jointly entitled, for the tax year . . . the Board may decide that the excess, or any part of it, is to be repaid to the Board.’ (italics supplied).
Note that unlike the position on social security benefits, HMRC have the discretion to recovery any overpayment no matter how it was caused. To deal with this discretion HMRC have a policy for overpayment recovery which is set out in COP 26.
The COP 26 policy is often referred to as the ‘dispute process’.
From 6 April 2013, HMRC have introduced a 3 month time limit to the dispute process. This is a major change to the process for claimants and advisers. The time limit is complex in practice. More detail about how it works can be found in the dispute process section.
HMRC announced in the Autumn Statement 2012 that they would be introducing cross award recovery from April 2014. This was introduced in October 2014. Prior to October 2014, where an overpayment debt existed on a claim that had ended, it could not be recovered against a later tax credits claim even if that claim was made by the same person. Instead the debt was passed to Debt Management and Banking for direct recovery.
The legislation has never prevented cross claim recovery, but the HMRC IT system was unable to do this. Given the growing amount of overpayment debt, and the fact it is likely to increase over the next few years, HMRC introduced a change to their IT to allow cross claim recovery.
We have added some further information about how cross-year recovery works in our dealing with debt section.
HMRC also announced in Autumn Statement 2013 that they would expand the use of private sector debt collection services in tax credits during 2014 and increase the use of private sector firms in carrying out compliance checks. It was also announced that HMRC would use private firms to help with debt recovery in the earlier stages on a payment by results basis.
HMRC announced in the Autumn Statement 2013 that from April 2015 tax credits payments would be stopped in-year where, due to a change in circumstances, a claimant has already received their full entitlement. This is to prevent a build up of overpayments.
In the Autumn Statement in December 2014, it was announced that the rules for self-employed workers claiming tax credit would be tightened.
From 6 April 2015, a self-employed claimant must carry out work on a commercial basis with a view to realising a profit and the work must be organised and regular. You can read more about this rule change in our self-employment section.
In Budget 2014, the Chancellor announced that from April 2016 the rate of tax credits debt recovery from ongoing awards will increase from 25% to 50% for households with an income of over £20,000 a year.
The Chancellor also announced in Budget 2014 that HMRC would be given powers to allow them to recover tax and tax credit debts directly from claimant’s bank accounts. Only debts of £1,000 or more will be eligible for direct recovery action and HMRC have said they will leave £5,000 across a debtor’s accounts as a minimum. Following concerns raised by a number of bodies, including LITRG, HMRC ran a consultation on the proposals during 2014. The Government’s response was published in November 2014 where a number of safeguards were announced. This measure was introduced by legislation in late 2015.
Prior to 2011, tax credit elements were increased each year using the Retail Prices Index (RPI). From April 2011, this changed to the Consumer Prices Index (CPI) and at the same time the basic element of WTC and the 30 hour element were frozen for 3 years.
From April 2014, it was announced that most tax credit elements would only increase by 1%, with the exception of the disabled adult and child elements which increased by the higher CPI.
It was then announced that all elements of WTC and CTC would be frozen for 4 years with the exception of the adult and child disability elements. The disability elements will continue to be increased by CPI. This means that many people will not see an increase in tax credits from April 2016.
See our section on Understanding the disregards.
The Summer Budget 2015 announced that the income increase disregard would reduce again to £2,500 from 6 April 2016.
Example: Bridget has been working in the same job for 2 years and her earnings for 2015/16 were £15,000. After doing well at work, Bridget is promoted to a supervisor role from April 2016 and her salary for 2016/17 will be £19,000. Under the current rules, Bridget’s 2016/17 tax credits award would not be affected by her pay rise because the increase of £4,000 is less than the £5,000 disregard. Bridget would not see a fall in her tax credits until April 2017. However, under the new disregard, Bridget’s 2016/17 tax credits award would be based on income of £16,500 meaning she would see a fall in tax credits from April 2016 rather than April 2017.
From 6 April 2017, the child element will no longer be available for third and subsequent children born on or after 6 April 2017 unless an exception applies. We explain the detail of this policy in our CTC section.
The family element was previously paid to all families. From 6 April 2017, it will only be paid where the claimant is responsible for a child or qualifying young person born before 6 April 2017.
Two-child limit policy changes
Following legal action by the Child Poverty Action Group, DWP announced changes to the two-child limit policy in respect of kinship and carers and adopters.
In April 2018, the then Secretary of State for Work and Pensions confirmed that the exceptions to the two-child limit will be extended for children who would otherwise be likely to be in local authority care and those who are adopted. This means that the exceptions will be applied regardless of the order in which the children joined the household.
Transfer of tax credit debts from HMRC to DWP
Regulations introduced in April 2015 allow DWP to recover tax credit debt concurrently with HMRC. These regulations are made under Section 126 Welfare Reform Act 2012 (which allows any tax credit functions to be transferred to DWP). The regulations allow DWP to recover tax credit by any of the methods it uses to collect its own debt, including deduction from benefit and Direct Earnings Attachment.
In February 2017, the Government announced that they would exercise these powers and that from April 2018 DWP would start to recover a segment of HMRC tax credit debt from people whose tax credit claims have ended and who have not engaged with HMRC in repaying their tax credit overpayment debt. This is a more general use of the power and is not only for those people who are moving to UC (where DWP will recover tax credit overpayment debts by reducing the UC award).
In March 2018, the Office for Budget Responsibility confirmed in their March report that due to IT difficulties this has been delayed until at least October 2018 and the process was introduced formally from June 2019, when HMRC begin transferring a segment of outstanding tax credit debt, not associated with a UC claimant, to DWP for them to recover.
This means that DWP can use their Direct Earnings Attachment (DEA) powers which HMRC do not have for tax credits. This means employers must, if directed, deduct amounts from an employee’s pay and send it to DWP. The amounts that can be deducted depend on whether the standard DEA rate or higher DEA rate is being used but it will be between 3% and 40% of the employee’s pay after deductions for tax, national insurance and pension contributions. You can read more about DEA on GOV.UK website and more about the transfer of tax credit debt to DWP in our tax credit section.
Various temporary changes have been made to the tax credit rules in relation to coronavirus. Please see our tax credits and coronavirus page for details.
Last reviewed/updated 1 July 2022