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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

Calculating the transitional element

This page gives an overview of how the transitional element is calculated. Although the calculations take into account all legacy benefits, the information on this page focuses only on tax credit claimants.

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The transitional element is part of the transitional protection available to those who claim UC under the formal managed migration process.

Broadly, under managed migration, a transitional element should be included in the calculation of your universal credit award if the total amount of your awards of existing benefits (the total legacy amount) on migration day is greater than the amount of an award of universal credit (the ‘indicative’ universal credit amount) you would have been entitled to on that same day.

  An important note is that the calculation uses only an indicative or notional universal credit amount. It does not use the actual amount of your first universal credit award compared against your tax credit (and other legacy benefit) award. As a result, it is possible that your actual universal credit award in your first assessment period will be different to this indicative universal credit amount as the rules used to calculate each are different.

This means that for some people, even though your first universal credit payment is less than your previous tax credit award, you may not qualify for any transitional element. We explain this further below under the hearing ‘Comparison with the first universal credit award’.

We are still waiting for confirmation from DWP about some of the information relating to calculating the transitional element. At present, we understand that universal credit claimants are not automatically provided with any breakdown of transitional element calculations.

Overview of the calculation

The process for calculating the transitional element is as follows:

Step 1 – daily rate of tax credits

DWP issues a migration notice to you as a tax credit claimant. You are given a deadline by which you must make your claim for universal credit. Where you make your claim by the deadline day (or final deadline day), the universal credit claim triggers a stop notice for HMRC to stop your tax credits and start the in-year finalisation process. If you do not make your claim by the deadline day, HMRC will terminate your tax credit claim.

At the same time, DWP ask HMRC to provide them with a calculation of your daily rate of tax credits, calculated on the basis of the information HMRC has about your circumstances on migration day, that is, the day before the universal credit claim is made. DWP will then convert this figure into a monthly figure by multiplying by 365 (366 in a leap year) and dividing by 12 as set out in the rules.

Step 2 – calculation of other legacy benefit amounts

DWP do equivalent calculations for any other legacy benefits you are claiming to reach a total legacy  benefit amount.

The benefit cap rules are engaged at this point, if applicable.

Step 3 – calculation of the universal credit indicative amount

DWP calculate a universal credit indicative amount. The rules say this is ‘the amount to which a claimant would be entitled if an award of universal credit were calculated in accordance with Section 8 of the Act (Welfare Reform Act 2012) by reference to the claimant’s circumstances on the migration day, applying the assumptions in paragraph (2)’.

The rules say this is ‘to be based on the information that is used for calculating the total legacy benefits, supplemented as necessary by further information or evidence as the Secretary of State requires’.

The assumptions DWP make when working out this figure are:

  • If you are entitled to child tax credit, then you are assumed to be responsible for any child or qualifying young person in respect of whom the individual element of child tax credit is payable to you
  • If you are entitled to an award of working tax credit that includes the childcare element, the indicative universal credit amount includes the child costs element and, for the purposes of calculating the amount of that element, the amount of the childcare costs is equal to the relevant weekly childcare charges included in the calculation of the daily rate (used to calculate the legacy amount) converted to a monthly amount by multiplying by 52 and dividing by 12.
  • If you are entitled to an award of tax credits, your earned income is  - the annual amount of any employment income or trading income (a defined by the tax credit rules), by reference to which the representative monthly rate of that tax credit is calculated for the total legacy amount, converted to a net monthly amount by dividing by 12 and deducting such amount for income tax and national insurance contributions as the Secretary of State considers appropriate.
  • If you would not meet the financial conditions set out in Section 5(1)(b) or 5(2)(b) of the Welfare Reform Act 2012 (which relate to the minimum payment of universal credit and the capital rules) then you are treated as if you are entitled to a nil award of universal credit for the purposes of the indicative amount. If the transitional capital disregard applies, you are considered to meet these conditions.
  • The indicative universal credit amount is calculated after any reduction for the benefit cap but before any reduction for higher level or other sanctions. There is no reduction for the benefit cap where the amount of the claimant’s earned income (or in the case of a couple their combined earned income) on the migration day is equal to or exceeds the benefit cap earnings threshold.

Step 4 – compare figures

DWP compare the total legacy amount with the universal credit indicative amount. The initial transitional element amount included in the first universal credit assessment period depends on whether the universal credit indicative amount is greater than nil:

  • If the universal credit indicative amount is greater than nil, the amount by which the total legacy amount exceeds the universal credit indicative amount is the initial transitional element amount.
  • If the universal credit indicative amount is nil, the total legacy amount plus any amount by which the income which fell to be deducted in accordance with Section 8(3) of the Welfare Reform Act exceeded the maximum amount. This means take the earnings amount used in the calculation (after deduction of the work allowance and taper) and deduct the maximum universal credit amount then add on the total legacy amount to calculate the transitional element.

Circumstances and income used to calculate the indicative UC amount

The legislative approach to calculating the indicative amount is explained above. However, detailed guidance about  how DWP are gathering all the information they need and what the actual steps in their processes are has not been published but our understanding from DWP is as follows:

  • DWP get information about employed income and self-employed income from HMRC, the same figures that HMRC use when working out the tax credit daily amount;
  • For unearned income, DWP use information from their own benefit records (for example, for income from other benefits) and from the universal credit claim (for example, for income from student loans etc);
  • For capital, DWP use information from the universal credit claim;
  • If the claimant is not claiming housing benefit on migration day, then a housing element will not be included in calculating the indicative universal credit amount;
  • If the claimant says they are a carer in their universal credit claim (and meets the conditions for a carer element), then a carer’s element will be included in calculating the indicative universal credit amount regardless of whether they are also claiming carer’s allowance (but note, carer’s allowance is taken into account in full when calculating universal credit).

The usual rules about appeals apply to entitlement decisions and so it follows that if you disagree with the transitional element amount, the fact your award doesn’t include a transitional element or any other aspect of transitional protection, the resulting universal credit award decision can be challenged under the mandatory reconsideration and appeal procedures.

Comparison with the first universal credit award

It is possible that you may receive your first universal credit award (for your first assessment period) and that is lower than your legacy benefits (when converted to a monthly income) but there is no transitional element included.

GOV.UK says that the transitional element will make up the difference if your universal credit entitlement is less than your previous tax credits or benefits. However, the complexity of the rules mean that this will not always be the case.

It may be the case that you will receive a universal credit award that is higher than your legacy benefit entitlement and still includes a transitional element award or you might receive a universal credit award that is lower than your legacy benefit entitlement but does not include a transitional element award.

There could be a number of reasons why this might happen, for example, tax credits are an annual benefit and universal credit is a monthly benefit, the transitional element is based on just an indicative universal credit figure rather than an actual figure and, of course, there are differences in definitions, calculation rules and what counts as income between universal credit and tax credits (and other legacy benefits).

We have also seen examples where people’s first universal credit award and award notice do not include a transitional element when it should but the transitional element has been added later. This may be a processing or timing issue with DWP. 

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