Tax Credit Update

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

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.

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.

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@£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 @£31.22 + disabled child £42.49 _________ Total Income £209.13

Effects for Angharad • Angharad is no longer obliged to authorise CSA to act. • Angharad’s 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.

Floating off Income Support • Angharad’s “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

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

CTC take-up opportunities • Grandparents on a retirement income of £250 a week couldn’t 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 couldn’t get IS, despite low income and 3 kids • Can now get £104.16 maximum CTC.

Protective claims • Some people may feel they won’t 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.

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

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.

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.

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

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

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.

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.

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.

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 .

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.

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.

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 year’s income. Final awards (at year end) will still be based on previous year’s 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.

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.

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)

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 year’s salary - £7,530.

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 Bethan’s • 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 Bethan’s (£18 a week) • It is only in 2006/7 that relevant income catches up with actual earnings (assuming no pay increase in meantime!!)

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.)

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

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.

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.

Tax Credit Update