Tax credits: the truth is rarely pure and never simple
Mark Willis explains the latest round of changes to tax credits.1
The government has emphasised the need to simplify the welfare system and introduce a pure incentive to work. However, current policy is driven by the need to reduce the deficit by cutting welfare expenditure and expenditure on tax credits has been targeted, to both reduce administrative costs and stop paying money to ‘middle income’ families. The latest round of changes introduced from 6 April 2012 have had wide-ranging and complicated consequences for millions of working families.
24-hour rule for couples with children
Most couples with children must now work at least 24 hours a week, instead of 16 hours a week, in order to qualify for working tax credit (WTC). One person in the couple may work at least 24 hours and they qualify. Or the couple may work at least 24 hours between them, as long as one is working at least 16 hours a week. There is no protection for families who previously qualified under the old 16-hour rule, so entitlement to WTC was lost on 6 April 2012, with no four-week run-on. This change does not affect child tax credit (CTC) and a couple with children will still be eligible for CTC, with the maximum amount only reduced for income over £15,860.
There are some exceptions to the new rule. The following couples with children still qualify where one is working at least 16 hours a week:
- the working partner qualifies for WTC under another route – ie, as a disabled worker or is a worker aged 60 or over;
- the non-working partner is ‘incapacitated’, or is entitled to carer’s allowance, or is in hospital or in prison.
For a couple without children who cannot qualify for WTC under another route, one must be aged 25 or over and working at least 30 hours a week.
The definition of ‘incapacitated’ is as used in the tax credits rule that allows a couple to claim help with childcare where only one partner is working.2A person is ‘incapacitated’ where one of a long list of benefits is payable (see box). In cases where the childcare disregard is payable in HB/CTB, it is possible to
qualify as incapacitated after 13 weeks rather than 28 weeks. The exception for carers is for those ‘entitled to carer’s allowance’ (CA) so includes an underlying entitlement. However, there is no exception if the person is a carer but has not claimed CA – eg, because the disabled person would lose her/his severe disability premium. There are no exceptions for any other circumstances, for example, if the nonworking partner is signing on and actively seeking work, or a full-time student, or over pension age.
The government has suggested that claimants can increase their hours, but research by USDAW and Working Families found most would be unable to find sufficient extra hours in the current economic climate.3 HMRC figures show that 203,000 families may have lost WTC under the new rule, losing up to £3,870 a year.4The new rule has also proved difficult to implement, not least because HMRC does not know who meets the conditions for the exceptions, and does not appear as yet to be able to cross check with the DWP who is entitled to CA or a disability benefit. HMRC holds details of working hours as declared on the tax credit claim form, and wrote to couples working less than 24 hours, advising them that they would no longer be entitled to WTC. The letter included details of the exception for incapacitated partners and asked claimants to contact HMRC if this applies to them. However, the additional concession for carers was made at the last minute and is to be explained in a second letter.
In some cases, couples who are no longer entitled to WTC may find the non-working partner is able to claim income-based benefits, for which the rule is that the claimant’s partner must not be working 24 hours a week or more. This applies to income-based JSA if the partner is looking for work, or income-related ESA, which could be an option where the non-working partner is ill or disabled, but does not meet the definition of ‘incapacitated’, which specifies contributory. Carers are eligible for income support without claiming CA if providing regular and substantial care for a person in receipt of DLA middle/high care or AA. These benefits will be payable if wages are low enough (eg, minimum wage on 16 to 19 hours a week), and especially if support for mortgage interest is included in the applicable amount. However, it will still leave the couple much worse off than on WTC, and usually only £10 a week better off than not working at all.
‘Incapacitated’ includes where one of the following is payable:
- disability living allowance (DLA) or attendance allowance (AA);
- industrial injuries benefit with constant attendance allowance;
- war disablement allowance with constant attendance allowance or mobility supplement;
- incapacity benefit (IB) or severe disablement allowance (SDA);
- contributory employment and support allowance (ESA) for at least 28 weeks. The 28-week period includes:
– two or more periods separated by less than 12 weeks that may be linked together;
– periods on statutory sick pay before qualifying for contributory ESA;
– periods on IB or SDA prior to conversion to contributory ESA;
– payment pending an appeal;
- credits for limited capability for work after the end of the 52-week period on contributory ESA;
- housing benefit (HB) or council tax benefit (CTB) with a disability premium, or higher pensioner premium;
- HB/CTB with a childcare earnings disregard because the non-working partner is incapacitated. The definition of incapacitated in the HB/CTB regulations includes:
– entitled to a work-related activity or support component in HB/CTB;
– would be entitled to a work-related activity or support component but for the other member being treated as not having limited capability for work (ie, failed to return questionnaire or attend medical);
– main phase ESA.
One advantageous change from 6 April 2012, is that couples with children where the non-working partner is entitled to CA can now qualify for the childcare element for the first time. However, childcare costs must be notified as HMRC will not know who qualifies under the new rule. The HB/CTB rules have not been amended so additional tax credits will count as income, without any extra earnings disregard. There is no qualifying benefit rule to allow extended backdating following an award of CA. Couples where one has recently claimed CA and are waiting to hear should report this as a change of circumstances, and it is also advisable to lodge an appeal against the decision that they are not entitled to WTC, or the childcare element. They should notify HMRC when CA is awarded and request backdating, appealing again if necessary. It is also important to remember that CA counts as income for tax credits purposes, and always has done. If not previously declared as income, this may lead to an overpayment.
Disregard for reduction in income
There was always a provision the Tax Credits Act 2002 to apply a disregard for a reduction in income, but it has never been implemented before.5Tax credits were originally designed to be flexible and responsive to changes, and to provide a financial incentive to work. However, this change, as with so many others, is designed to reduce expenditure. If income goes down during the tax year by less than £2,500, tax credits will not be increased. This results in missing out on tax credits of up to £1,025 a year, compared to previous years. If income goes down by more than £2,500, tax credits will be increased, but will not reflect the first £2,500 of the drop in income. This is not a case of waiting until the end of the year to make good the underpayment, as the disregard means that entitlement in the current year is based on current year income plus £2,500. It is only at the start of the new tax year that the lower income may have an impact on entitlement in 2013/14. By contrast however, from April 2013, the disregard on an increase in income will be further reduced from £10,000 to £5,000.
Removal of family element from ‘middle income’ families
Tax credits were introduced partly to replace a ‘children’s tax credit’ which was an addition to the personal tax allowance for people with children. The intention was that the tax credits system would be inclusive and in keeping with the idea of progressive universalism, so that the majority get something, with more going to the poorest families, with no stigma attached to claiming. In practice, it meant that families on incomes of up to £58,000 (sometimes more) received at least some of the family element of £545 a year. On taking power, the current government identified this as one area targeted for cuts. The change in the rules from April 2012 means that the second income threshold (£40,000 in 2011/12), which protected the family element until income reached a certain level, has been scrapped. However, the rules have not been changed to introduce a fixed income cut-off point. In some cases, where maximum tax credits are high enough due to childcare costs or disabilities, there will still be a substantial amount of tax credits payable on incomes of £40,000 or higher. HMRC sent incorrect and misleading letters to claimants stating that the income limit for tax credits is £26,000 for families with one child. Approximately a million claims may be withdrawn for families who were entitled to the family element only in 2011/12. However, these families should be advised to renew a protective claim with a ‘nil award’ for 2012/13. If income goes down significantly, they may receive a payment for the whole year, but if they wait to make a new claim they may lose out, particularly due to the cut to backdating.
From 6 April 2012, new tax credit claims can only be backdated for 31 days, cut from 93 days. An increase to an existing award due to a change in circumstances can only be backdated one month, cut from three months. Further backdating is only possible for a new claim following granting of refugee status, or increase or new WTC claim following the award of a qualifying disability benefit, but the claim must now be made within one month of notification of either event, rather than three months previously. This change may be particularly important for new parents making their first claim for tax credits. If they wait until they have registered the birth, claimed child benefit and heard back, it is very likely that they will have missed out on tax credits. New parents should be advised to claim tax credits as soon as possible, leaving the box on the form for the child benefit reference number blank if necessary, so as not to miss out. There is no requirement to be entitled to child benefit before claiming CTC.6
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- 1. Oscar Wilde, The Importance of Being Earnest, 1895
- 2. Reg 13(4) to (8) Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002
- 3. www.usdaw.org.uk/newsevents/news/2012/mar/primeministerandchancellor.asp...
- 4. www.hmrc.gov.uk/stats/personal-tax-credits/cwtc-main-apr12.pdf
- 5. s7(3)(c)&(d) TCA 2002
- 6. www.hmrc.gov.uk/manuals/tctmanual/tctm02205.htm