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Universal Credit (UC) is gradually replacing tax credits, and some other social security benefits. Universal credit is now available across the UK and HMRC state that it is no longer possible for anyone to make a brand-new claim for tax credits. The only exception is for certain people who are granted refugee status. Instead, people are expected to claim UC or pension credit depending on their circumstances.  Currently, existing tax credit claimants can continue to renew their tax credits and/or add extra elements to their claim. See our existing tax credit claimants page for more information. Our understanding is that the majority of existing tax credit claimants will move to either universal credit or pension credit by the end of the 2024/25 tax year. You can find out more about this in our universal credit section. 

Updated on 6 April 2024

In-year finalisation

If you have been claiming tax credits and start to claim universal credit in the same tax year or, from 6 April 2024, you have received your migration notice and don’t claim universal credit on or before the deadline in your migration notice, your tax credit award will stop and HMRC will finalise your tax credit award using an in-year finalisation process.

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In-year finalisation is different to the normal annual finalisation that tax credit claimants are more familiar with. This is because it takes place during the tax year, rather than after the tax year ends, and in most cases it uses information that relates to part of the year, that is the period of the actual tax credit award up to the date it ends.

How in-year finalisation works

The in-year finalisation process is, in most cases, trying to establish your actual income received in the shortened award period (see below for if you have income from self-employment as the rules are slightly different). This is different from how your award will have been finalised in earlier years under the normal end of year finalisation processes and it may be different to the way your initial award was calculated for the current tax year. HMRC then adjust the part-year income to an annual figure and then re-calculate the income and award for the part-year period. It means that you could end up with an overpayment or underpayment due to the way the in-year process works even though you may have kept HMRC up to date with your income figures.

These next two examples show how the normal end of year process compares to the in-year process:

Example: Part 1 – normal end of year finalisation process

Justine is a lone parent and claims tax credits. She works 30 hours a week. On 1 December 2023, Justine moves in with David. Due to David’s income, they no longer wish to claim any state support. Justine tells HMRC about the change straightaway and her single tax credit claim is ended from 30 November 2023. Justine’s income for 2022/23 was £20,000 which is made up of £15,000 earnings and £5,000 bonus paid in August 2022.

Although HMRC end Justine’s single claim from 30 November 2023, they will not collect any information from Justine at that point to finalise the claim. In May 2024, HMRC send Justine a pack which asks her to finalise her claim for the period 6 April 2023 to 30 November 2023. To do this, the pack asks Justine to confirm her actual income for the full tax year 2023/24. Justine provides a figure of £21,000. This is made up of her earnings of £16,000 and a £5,000 bonus paid in August 2023.

This 2023/24 figure is compared to her 2022/23 figure and as the difference is only £1,000, her claim is finalised based on an income of £20,000. (See our income page for more information about which figure is used and why.)

However, as Justine’s single claim only ran for 239 days of the year, HMRC will pro-rate the £20,000 to reflect this and use £13,095 in the calculation.

The next example shows how Justine’s claim will be finalised under in-year finalisation if we change things and assume the couple need to make a claim to universal credit in the tax year 2023/24 (ie the same year that Justine has been claiming tax credits).

Example: Part 2 – in-year finalisation process

Justine’s single tax credit claim will end from 30 November 2023. As soon as HMRC receive a notification from DWP that she has claimed universal credit (with David), HMRC will either ask Justine to provide them with her employment income figure from 6 April to 30 November 2023 or they will use income data obtained through the RTI (Real Time Information) tax system and populate the review form with that information for Justine to check.

Justine’s actual income from employment received between 6 April and 30 November 2023 was made up of £10,476 plus £5,000 bonus making a total of £15,476. This is the figure Justine will put on her review form.

HMRC will then convert this figure to an annual figure – £23,699 (£15,476/239 x 366 NB. 2024 is a leap year). This figure will be compared to her previous year income of £20,000. As this has increased by more than £2,500, her award will be finalised using an income of £21,199. This will be pro-rated for the 239 days of her award and income of £13,843.06 will be used in the calculation.

However, Justine’s award was paid between April 2023 and November 2023 based on an income of £20,000, not £21,199 and so Justine will have an overpayment of around £321.

The cause of Justine’s overpayment in Part 2 of the example above is the way the in-year finalisation process works. It assumes that Justine’s income is even throughout the year, and that she will receive a bonus in the second part of the year when in fact she doesn’t. This means that despite Justine doing everything right with regards to keeping HMRC updated, she has an overpayment of around £321 because of the change in rules between the rules used to set the initial award (and what would have been used under the old end of year finalisation process) and the new in-year finalisation.

In some cases, where someone’s income is lower in the first part of the year, for example if they are on maternity leave in the early part of the year before moving to universal credit, they may end up with an underpayment of tax credits due to this process (which would not have happened under the normal end of year finalisation process).

Overpayments as a result of the in-year finalisation can be recovered by HMRC.

Calculating income for in-year finalisation

If you are employed, it is likely that HMRC will use the earnings information they receive from your employer. HMRC will use the actual earnings you have received in the part-year award period (that is, from the start of the award to the date that the award ends). The review pack from HMRC may ask you to simply check the figure or it may ask you to provide the figure yourself.

You should add up any pension; investment; property; foreign; notional income that you received in the part-year award period and tell HMRC about anything that is over £300.

If you have any social security income or student income, you need to tell HMRC about the actual amounts you have received in the part-year award period:

Contributions to approved pension schemes that you have actually paid in the part-year award period and authorised gift aid payments that you have paid in the part-year award period can be deducted. For example, if the tax credits claim is between 6 April 2024 and 30 November 2024 and then the universal credit claim is from 1 December 2024 – you can only deduct any pension contributions you actually paid between 6 April 2024 and 30 November 2024 when working out your income for tax credits. Any pension contributions paid from 1 December 2024 should be taken into account by DWP when calculating your universal credit.

Calculating self-employed income for in-year finalisation

The process of calculating income from self-employment under in-year finalisation is more complicated because most self-employed claimants will not know their actual income until much later. It would be very difficult for self-employed claimants to tell HMRC their actual income and expenses for a part year period and doing this would lead to unfairness for people who have fluctuating earnings from self-employment.

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. However, as the tax credit system is coming to an end, from 6 April 2024 onwards HMRC will be asking for actual figures or a reasonable estimate for the basis period that ends 5 April 2024. Most tax credit claimants have a basis period that is the same as the tax year (6 April to 5 April) but where adjustments have to be made to your basis period under the tax rules, our understanding is that you should use the figure that excludes any transition profits for in the 2023/24 tax year for in-year finalisation.

HMRC have some guidance notes for self-employed claimants on how to do this with step-by-step instructions. These can be found in the TC603URD notes.

HMRC have produced a calculator to help you work out your part-year profits if you are self-employed.

There is more detailed information about in-year finalisation for the self-employed on our website for advisers, Revenuebenefits.

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