Universal credit: Finalising tax credit claims

This page explains how tax credit claims are finalised when a UC claim is made in the same tax year. The process used is different to the normal tax credits finalisation process which is outlined in our tax credits section.

In-year finalisation

In October 2014, HMRC introduced in year finalisation (IYF) of tax credit claims for people moving to UC and from 6 April 2024, this process also applies to tax credit claimants who receive a migration notice, regardless of whether or not they go on to make their UC claim by the deadline in the notice. With effect from 8 June 2024, in-year finalisation will also apply where tax credit awards are ended after issue of a tax credits closure notice. This is because HMRC and DWP want claimants to have a ‘clean break’ from tax credits and they say the normal end of year finalisation would not allow this. 

To address these issues, legislation was introduced by HMRC/DWP to allow HMRC to in-year finalise tax credits claims in the year of transition to UC. Initially, the legislation was contained in Regulation 17 Universal Credit Transitional Provision Regulations 2013 . However, this was repealed by the Universal Credit (Transitional Provisions) Regulations 2014. Not long after this, SI 1626/2014 introduced Regulation 12A into the 2014 Transitional Provision Regulations, which amends the Tax Credits Act 2002 to allow for in-year finalisation. From 6 April 2024, SI 341/2024 amends Regulation 12A so that it also applies to a tax credit claimant who is issued with a migration notice but does not make their UC claim by the deadline in that notice. This is so that at the point the tax credit award ends, under the terms of the migration notice, in-year finalisation will be used to finalise the terminated tax credit award.

This is a huge departure from the standard rules and will create financial winners and losers when compared to the standard end of year finalisation system.

Regulation 12A applies where:

From 6 April 2024, Regulation 12A also applies where:

From 8 June 2024, the in-year finalisation rules also apply in cases where a tax credit closure notice is issued. This is achieved by amendments to the Welfare Reform Act 2012 (Commencement No.32 and Savings and Transitional Provisions) Order by SI 611/2024 which state that in-year finalisation rules apply in the same way as if the claim for pension credit had been a claim for universal credit or the deadline day in the tax credit closure notice had been the deadline day in a migration notice.

In these cases, a modified in-year finalisation process (set out in the Schedule to the Regulations) will operate unless HMRC deem that it is not reasonably practicable to apply the modified legislation. In such cases, normal end of year finalisation will operate.

One point worth highlighting is that, where IYF is used because the tax credit claimants make a UC claim, the UC claim must be made in the same tax year. In most cases, the UC claim will be made shortly after the tax credit claim ends or it will be made and lead to the termination of the tax credit claim. However it is possible that there will be a long delay – for example a WTC only claimant loses their job and their tax credits stop in September 2023, they live off some small savings for a few months and claim UC in February 2024. HMRC will use the IYF process to finalise the tax credit claim because both claims exist in the same tax year (6 April - 5 April).

However, if a claimant lost their job in January 2024 and claimed UC in May 2024, then it appears that HMRC cannot use the in-year finalisation process because the UC claim is made in a different tax year.

In-year finalisation – the detail

The normal end of year finalisation process operates by comparing income for the ‘current year’ (which is the tax year just ended) with income for the ‘previous year’. So finalisation of 2023/24 tax credits claims involved comparing 2023/24 income with that of 2022/23 and applying any relevant income disregards. This produces a figure referred to as ‘relevant income’. If the claim lasts for a full tax year, then this relevant income figure is used to calculate entitlement. If the claim only lasted for part of a tax year, the relevant income is pro-rated to the period of the claim. The result is that income is spread evenly across a tax year no matter when it is earned.

Under the modified in-year finalisation process, HMRC will use a two-step process. The first step will involve finding the ‘part tax year’ income (as defined in the regulations). For most types of income, this will be the income actually received in the part tax year, but there are special rules for calculating self-employed income. The second step will involve using that part tax year income to calculate a ‘notional current year income.’ This notional current year income will then be compared to previous year income, applying the relevant disregards. This will give the ‘relevant income’ figure to be used in the calculation of tax credits.

‘Notional current year income’ is defined as income for the part tax year to which the claim relates, divided by the number of days in that part tax year, multiplied by the number of days in the tax year in which the part tax year is included and rounded down to next whole number of pence. For couples, it is the joint income that is used.

Employed income

The easiest way to understand how in-year finalisation will work for those with employment income is using examples.

Example 1 – calculation using in year finalisation rules

Carol is a lone parent. She works 30 hours a week. On 1 December 2023, Carol moves in with David who is already claiming Universal Credit. Carol’s tax credit claim is ended from 30 November 2023. Carol’s income for 2022/23 was £12,000 and it was similar for 2023/24.

As soon as her claim has ended, HMRC will either ask Carol to provide them with her employment income figure from 6 April to 30 November or they will use data obtained from her employer through the RTI (Real Time Information) system as part of an auto-finalise process (whereby Carol only needs to tell them if something is wrong or incomplete). Carol’s income from employment between 6 April and 30 November was £8,000. This will be converted to an annual figure of £12,251.04 (£8,000 divided by 239 days x 366 days - 2024 being a leap year). This £12,251.04 figure will be compared to the £12,000 from previous year and Carol’s claim finalised on £12,000 (because her rise in income was less than the £2,500 disregard).

Example 2 – the financial impact of in year finalisation rules

Suppose Carol (from Example 1) receives a bonus in her employment in August so that her income for the period 6 April 2023 to 30 November 2023 is £12,000 (£8,000 earnings and £4,000 bonus). HMRC will treat her income for the year as £18,376.56 (£12,000 divided by 239 days x 366 days - 2024 being a leap year). This will be compared to previous year income of £12,000 and the income disregard of £2,500 applied meaning that HMRC will use income of £15,876.56 when finalising Carol’s claim (although this will be pro-rated down for the number of days in the claim as happens currently in end of year finalisation process).

If we look at this same scenario under the standard end of year finalisation rules, Carol would declare to HMRC her 2023/24 income as £16,000 (£12,000 earnings plus a £4,000 bonus). This would be compared to her previous year income of £12,000 and the £2,500 disregard applied, Carol’s claim would be finalised using an income of £13,500 (again this would be pro-rated down for the number of days in the claim).

You can see that in this example, Carol will be worse off under in-year finalisation because of the timing of the bonus which artificially inflates her earnings across the whole year.

In Example 1, there is no real difference between end of year and in year finalisation. This is because Carol earns her income equally across the year with the same amount each week. But in a situation like Example 2 where there is an increase in income in the early part of the year, in-year finalisation will mean the person receives less tax credits for the period than they would have done under end of year finalisation. The opposite is also true, so that someone who has lower income in the first part of the year, for example because they are on maternity leave, will get more tax credits that they would under the end of year finalisation process.

Self-employed income

Please note: This information in this section is subject to change. Where claimants need to calculate how their self-employed income for in-year finalisation is calculated from 6 April 2024 onwards, we recommend contacting HMRC directly until further information is available.

There has been some new legislation introduced which affects the calculation of self-employed income for in-year finalisation from 6 April 2024. In recent years, for trading income under in-year finalisation, HMRC have accepted either actual figures (where possible) or a reasonable estimate of taxable profits for the basis period that ends in the tax year that you move to universal credit. As a result of basis period reform in the tax system, HMRC amended the tax credit rules from 6 April 2024 to change how income is calculated from self-employment during in-year finalisation. Unfortunately the rule changes are not clear and are difficult to apply in practice. Our understanding is that HMRC want self-employed claimants to report their part year income from self-employment (between the 6 April and the date tax credits end) as accurately as possible. This may need to be based on an estimate of trading income for the 2024/25 tax year. We advise all self-employed claimants to contact HMRC before completing their in-year finalisation form to ensure the correct figure is used. We will update the page once we have further information. For now, we advise self-employed tax credit claimants who receive in-year finalisation documents to contact HMRC for advice on how to calculate their income from self-employment between 6 April and the date their tax credits end.

Carried-forward losses - losses carried forward from previous years (that can be offset from profits from the same trade should be deducted from the profit figure calculated for the part-year period.

Example 5

Theo is working out his income figure for in-year finalisation for a 150 day part award period. His carried forward loss from the previous year is £5,000. His estimated taxable profit for the basis period ending in the tax year he claimed UC is £15,000 and for the 150 day award period is £6164. He should deduct the £5000 from £6,164, leaving £1,164 to declare for his trading profit for the part-year period.

Household income – general points

For the following types of income, claimants should declare the actual amount they have received in the part year, that is, from the start of the award to the date that the award ends due to in-year finalisation:

The £300 disregard for ‘Other income’ is not pro-rated and the figure is applied in full. In other words, when working out the amount of other income (pension; investment; property; foreign; notional), the total ‘other income’ for the part-year is added together and the full £300 disregard applied.

The normal tax credit rules allow the gross amount of contributions to approved pension schemes and of authorised gift aid payments to be deducted from the gross income figure. Whilst there is nothing specific in the amended legislation for in-year finalisation on this point, HMRC have confirmed to us that they expect only the actual pension contributions/gift aid payments that have been paid in the part-year award period to be deducted from the part-year gross income figure for in-year finalisation. This includes for self-employed claimants.

Last reviewed/updated 4 September 2024