Generous employers can give tax credit problems

Published on 4 July 2005

Employers who provide generous sickness or maternity arrangements can, through no fault of their own, contribute towards tax credit overpayments of their employees. This is due to rules hidden in the small print of tax credits law and arises most often where generous employers have schemes that continue longer than the state provides.

Employees who are off sick for up to 28 weeks are normally entitled to Statutory Sick Pay. Employees who are on ordinary maternity leave (26 weeks), ordinary adoption leave (26 weeks) or paternity leave (2 weeks) are normally entitled to Statutory Maternity Pay, Statutory Adoption Pay or Statutory Paternity Pay respectively. After these ordinary periods end some employers offer generous schemes which continue payments beyond the statutory period, whilst some employers offer additional unpaid leave. In these situations, when employers offer additional benefits after the statutory periods ends, tax credit overpayments can arise.

Working Tax Credit, together with the childcare element (to help towards your childcare costs), is payable when an individual is in "qualifying remunerative work". But what happens when an individual is away from work for an extended period due to sickness or other cause?

For those who are off work sick tax credits law allows the person to be regarded as in "qualifying remunerative work":

  • if they are in receipt of Statutory Sick Pay (or would have qualified but for the fact that they are Self Employed);
  • if they are in receipt of short term incapacity benefit at the lower rate;
  • if they are in receipt of Income Support on the grounds of incapacity for work, or National Insurance Credits on the grounds of incapacity for work

 

provided that the person was working at least 16 or 30 hours per week (whichever applied to your claim) immediately before receiving any of these benefits.

The law also allows the person to be regarded as in 'qualifying remunerative work' if they are on ordinary maternity leave (26 weeks), ordinary adoption leave (26 weeks) or paternity leave (2 weeks) regardless of whether they are receiving any Statutory payments (Statutory Maternity Pay, Statutory Adoption Pay, Statutory Paternity Pay).

In these situations a person's tax credits award can continue together with what can be substantial contributions to childcare costs.

However these tax credits will not continue indefinitely. For those who are off work sick once their Statutory Sick Pay ends (after 28 weeks), or their short term lower rate Incapacity Benefit ends (after 28 weeks) or they have reached 28 weeks on Income Support due to incapacity for work or 28 weeks of National Insurance Contributions due to incapacity for work they will no longer be treated as being in "qualifying remunerative work" and they will no longer be entitled to tax credits.

The same applies to people after the end of their ordinary periods of maternity ( normally 26 weeks), adoption (normally 26 weeks) and paternity leave (2 weeks).

This means that where an employer continues payments when the statutory payments stop but the employer does not tell the employee, a tax credit overpayment can occur.

Since both types of payment are taxable it is not obvious to the employee that something different has happened and they still remain on sick or maternity leave.

However their entitlement to tax credits has ceased. Therefore the tax credits which they will continue to receive will become repayable. They risk getting into debt at what can be a particularly difficult time.

The same situation occurs when employers allow additional sick, maternity, adoption or paternity leave which is unpaid. As far as the employee is concerned they are still on leave and so despite the fact that they are no longer receiving statutory payments their circumstances are unchanged. However again their entitlement to tax credits will have ceased and an overpayment will occur if they continue to receive tax credits after their ordinary periods of leave have ended.

Revenue explanation and warnings to claimants on some of these issues have been minimal. In some cases we have seen, the Tax Credits Helpline have compounded the problem by giving out reassurance that if people are off sick or on maternity leave then there is no problem with them continuing to receive tax credits.

In these circumstances, we recommend that individuals should, until Revenue literature is explicit on all of these issues, request that the overpayments arising should be written off by the Revenue in line with their own COP 26 rules relating to the treatment of overpayments caused by official error. 

(04-07-2005)

Contact Name: John Andrews (Tel: 0844 579 6700, Fax: 0844 579 6701)