Tax Credit Update

1
Tax Credit Update
Migration to Child Tax Credit for IS and JSA
claimants by April 2006 Finalising awards for
2003/4 and Renewals Overpayments and
eliminations. Housing Benefit and tax credits
2
Migration from Income Support/JSA

• Child personal allowances and premiums will have
  disappeared from Income Support/JSA by April 2006
• They have already gone for over 60s on Pension
  Credit. They will remain as part of HB/CTB

• Claiming CTC while on IS/JSA
• In 2003/4, IS/JSA claimants who claimed CTC had
  the normal applicable amount. CTC counted as
  income.
• From April 2004, their IS/JSA became adult
  only. CTC is now ignored as income.

3
Migration from Income Support/JSA

• What happens now?
• New IS/JSA claimants with children claim CTC for
  the children and receive adult-only IS/JSA.
• Existing IS/JSA claimants who have not yet
  claimed CTC carry on with adult and child
  applicable amounts
• At some point in next year they will be contacted
  by Inland Revenue and notified when CTC will
  start. Their iS/JSA will then become adult only
• This process has been delayed new aim is for
  process to be completed by April 2006.

4
Old versus new system
Angharad is a lone parent with two kids (one aged
6 - on DLA - one aged 6 months). She gets Income
Support, Child Benefit and 30 maintenance.

• Old system (from April 2004)
• Income Support 151.58
• Applicable Amount Adult 55.65 2
  child_at_42.27 Family Premium 15.95 Disabled
  Child Premium 42.49 198.63
• less Child Benefit (after baby disregard)
  and maintenance
• Child Benefit 27.55
• Maintenance.. 30.00
• Total Income 209.13

• On switching to CTC
• Income Support 25.65
• (Applicable amount adult 55.65 less
  maintenance)
• Child Benefit 27.55
• Maintenance. 30.00
• Maximum CTC.125.93
• (Family element 10.50 Baby addition
  10.50 2 child _at_31.22 disabled child 42.49
  _________
• Total Income 209.13

5
Effects for Angharad

• Angharad is no longer obliged to authorise CSA to
  act.

• Angharads income rises to 209.13 from 171.20
  in 2002 3 as a result of
• The extra 10.50 baby addition
• A general above inflation increase in amounts for
  children an extra 27.43 since 2002/3

• Maintenance still counts as income against adult
  only IS/JSA, although all other child income is
  ignored.

6
Floating off Income Support

• Angharads adult only Income Support is 25.65.
  
• If Angharad started to claim Incapacity Benefit
  (55.90) her IS would cease on switching to the
  new system.

• She would gain by
• The difference between her IB and IS (30.45)
• keeping all her maintenance (30.00)

• She would lose by
• a fall off in any HB/CTB up to 85 of her gains
  (after a 15 maintenance disregard) -
• losing access to discretionary Social Fund

7
CTC take-up opportunities

• Many people whether on IS or not may not be
  affected by complications of tax credit
  assessment.
• Will get maximum CTC as income well below 258 a
  week.

• A couple on Incapacity Benefit of 147.00, Child
  Benefit 27.55 and a works pension of 80 are
  well over their Income Support level, even after
  a DLA claim for one of the children.
• They can now get maximum CTC of 107.90

8
CTC take-up opportunities

• Grandparents on a retirement income of 250 a
  week couldnt get any more than 16 Child Benefit
  and 9.90 child addition to Retirement Pension
• They can now get 41.72 Child Tax Credit.

• A lone parent student could only get Income
  Support during Summer (due to grant/loan income)
• Can now get maximum CTC of 41.72 all year.

• An ex-miner still had 10,000 of redundancy so
  couldnt get IS, despite low income and 3 kids
• Can now get 104.16 maximum CTC.

9
Protective claims

• Some people may feel they wont get anything now,
  but might be advised to make a protective claim
  if any doubt about future circumstances
• They might well get a nil provisional award now

• But if income changes by end of the year they can
  have the nil award revised.
• New calculation will include all elements for the
  year.
• If they leave claiming until it happens, tax
  credits will only go back 3 months.

10
Renewing your claim

• From 5th April 2004
• provisional awards for 2004/5 are made,
  continuing old award at 2003/4 rates. Any
  reductions to eliminate likely overpayments cease

• Between April and July 2004,
• renewal forms go out
• Annual Review Form (TC603R) to all claimants
  may or may not need to be returned
• Annual Declaration Form (TC603D) to some
  claimants which must be returned by 30/9/04

11
Renewing your claim

• IR will then check your actual income in 2003/4
  and
• confirm a final award for 2003/4, and
• an ongoing award for 2004/5 at the new rates,
  (backdating the difference to April 2004)

• Time limits
• First limit September 2004 If forms not
  returned, all payments stopped, but can then be
  fully backdated
• Final limit 31st January 2005 if not returned,
  claim ceases. All payments since April 2004 are
  recoverable. Can make a new claim, but can only
  only backdates 3 months.

12
Overpayment of the new Tax Credits

• Tax credits lead to routine under and over
  payments, as award not finalised until end of
  year reconciliation completed.
• Underpayments lead to a nice arrears cheque.
• Overpayments are recovered by reduction of future
  tax credits, adjustment of income tax code or a
  payment demand.
• Couples are jointly liable for overpayments,
  whether WTC or CTC, whoever it was paid to.

13
Recoverability of Overpayment

• Overpayments are routine for IR rather than
  exceptional (as in DWP)
• No appeals. Are generally recoverable unless IR
  accepts official error or hardship

• Official error caused by the Inland Revenue
  and you could not have reasonably known that you
  were being overpaid at the time
• Hardship looking at income, expenditure,
  inability to afford essentials, savings,
  incapacity or disability, children under 5, time
  to repay, other debts to IR, previous payment
  history

14
Rate of recovery

• Payments are recovered at a rate of
• 10 of tax credits if on maximum award
• 100 if entitled to CTC family element only.
• 25 of next years award in all other cases

15
In-year eliminations of overpayments.

• If IR suspect an overpayment could arise they can
  act to recover the likely overpayment by the end
  of the current year. This could mean severe cuts
  or stopping of tax credits.
• IR can make additional payments for hardship if
  asked
• 90 if on IS/JSA and
• 75 if award of tax credit includes a disability
  element or maximum WTC or maximum CTC (without
  any WTC)
• 50 in other cases
• These payments will be recovered next year as
  part of any overpayment recovery.

16
In-year eliminations of overpayments.

• Eliminations have had effect of
• By-passing issues of official error
  recoverability
• Destabilising incomes and taking families below
  IS level.

17
Housing Benefit and tax credits

• Underpayments of Tax Credit
• HB/CTB continue to be worked out weekly.
• They will continue to have child personal
  allowances and premiums
• HB/CTB has an extra Family Premium Baby Addition
  of 10.50, but counts Child benefit in full as
  income

• WTC and CTC count in full as income broadly the
  amount actually received each week, not any
  adjusted award
• So can be worthwhile being underpaid tax credits
  during year to get more HB/CTB.

18
Housing Benefit and overpayments

• Underpayments of Tax Credit
• HB/CTB are based on actual tax credits paid in
  each benefit week. Arrears of tax credit do not
  retrospectively affect HB/CTB
• So can be worthwhile being underpaid tax credits
  during year to get more HB/CTB.

• Overpayments of Tax Credit
• Income for HB is the amount of WTC/CTC awarded
  less the amount of the deduction for previous
  overpayments.
• Does not include additional payments e.g
  compensation or hardship payments .

19
Changes in circumstances

• Awards are not fixed like the old tax credits.
• Three different categories of changes
• changes which end your award
• changes in entitlement to tax credit elements
• changes in income

• Changes which end your award
• If a partner leaves or comes to live with you -
  make a new single or joint claim.
• You get Working Tax Credit only and stop work
• Your average childcare costs change by more than
  10 a week.

20
Changes that affect tax credit elements

• Changes in entitlement to elements
• The Inland Revenue work out your tax credits over
  a relevant period. If nothing changes in the
  year, the tax year will be your relevant period.
• Anything which changes your entitlement to a tax
  credit element (e.g. a new child, an award of DLA
  etc) will trigger a new relevant period.
• Your tax credit will then be recalculated
  according to the new elements.

• If you delay reporting these changes
• arrears can be backdated for up to 3 months.
• any overpaid tax credit can be recovered.

21
Changes in relevant income (1)

• Relevant income is income in the whole tax year,
  not income in any relevant period.
• Initial awards are made using previous years
  income. Final awards (at year end) will still be
  based on previous years income, unless relevant
  income in current year has
• gone up by more than 2,500 this year
• fallen in the current year.

• If your income is less than last year, you will
  initially be underpaid tax credits.
• Arrears can be backdated for the full 12 months.

22
Changes in relevant income (2)

• If you have more than one relevant period in a
  year (because of a change in your entitlement to
  tax credit elements), then a separate tax credit
  calculation is made for each period
• BUT relevant income is not income earned during
  each relevant period.
• It is the proportion of the overall annual income
  (divided up according to the number of days in
  each relevant period).
• This can make a big difference to tax credits
  during your first year of working or on moving to
  a higher paid job.

23
With income unchanged in year

• Bethan Steadystate has been in work continuously
  for the last couple of years. So she has one
  relevant period. Her relevant annual income is
  15,060 a year.
• Bethans maximum tax credit will be reduced by 37
  of her excess income 15,060 -- 5,060 threshold
  10,000
• Reduction is 3,700 over the year (c. 71 a week)

24
With income changing during year

• Angharad Newdeal is offered an identical job,
  exactly midway through the tax year.
• Her relevant income and reduction will be very
  different at first.

• Angharad has two identical length relevant
  periods
• First 6 months on Income Support/CTC - when her
  income for tax credits was 0
• Second 6 months on becoming entitled to elements
  of WTC when her income will be half a years
  salary - 7,530.

25
Changing income (2)

• Angharads relevant income is based on her
  income over the whole year
• 0 (1st period) 7,530 (2nd period) 7,530
• 7,530 -- first 2,500 of increase over last year
  5,030
• So initially Angharad will qualify for maximum
  Tax Credit.
• Her reduction from maximum tax credit is 71
  less than Bethans

• In 2005/6, Angharad will earn the same 15,060 as
  Bethan BUT the first 2,500 of increase from
  previous year is ignored her relevant income
  will be 12,560 (or 249 pw). Angharad will get a
  reduction, but still 925 less than Bethans (18
  a week)
• It is only in 2006/7 that relevant income catches
  up with actual earnings (assuming no pay increase
  in meantime!!)

26
Protecting out of work benefits
A big issue for people on sickness or disability
benefits. What if you have to give up work?

• Protecting incapacity rates
• Your rate of Incapacity Benefit and SDA are
  protected for up to 2 years after starting work
  with WTC.
• IS disability premium - for long term sickness -
  is not automatically protected beyond the basic
  8 weeks but you may be eligible for the 52 week
  linking rule
• The protection applies to the rates only and is
  not a guarantee that you will be accepted as
  unfit for work.)

27
52 week linking rule
This applies when
Someone has been incapable of work for more than
196 days, and
They start work or training within one week of
entitlement to their relevant benefit for
incapacity ends.
They notify the DWP within one month of benefit
ending that they have started work or training
28
If these conditions are met, someone is classed
as a Welfare to work beneficiary
This lasts for a period of 52 weeks starting from
the day after the last day of incapacity.
A letter should be received from the DWP stating
when this protection will end.
29

• Disability Living Allowance
• DLA entitlement is not affected in law by
  capacity for work
• BUT DLA have suspended awards pending
  investigation in case move to work indicative of
  reduced care/mobility needs. Reverse may well be
  true e.g. support to work.