A welcome respite for tax credit claimants

Published on 5 December 2005

In his Pre Budget speech the Chancellor announced a number of measures which will, in time, alleviate some of the harsher edges to the tax credits system, and which, for the last 18 months, we and others have been campaigning. It is hoped that those who have been caught in the past, or will be caught before it is possible to implement these changes, will now have a "softer touch" applied until the computer systems can be adjusted to cope.

The main changes, which we broadly welcome, are intended to reduce the incidence of overpayments. They are as follows:

  • From April 2006, the disregard for increases in income between one tax year and the next will rise from £2,500 to £25,000, ensuring that almost all families with increasing incomes will not have their tax credit entitlement reduced in the first year of the increase.
  • From November 2006, when an overpayment is identified during the year, HMRC will cap recovery by the same percentages as apply now to end-of-year overpayments. This means that for all overpayment recoveries, people on maximum tax credits will have their payments reduced by a maximum of 10%; 25% for those on more than the family element of child tax credit; and 100% for those who are paid no more than the family element.
  • From April 2007, when claimants report a fall in income during the year, their tax credit payments will be adjusted for the rest of the year to reflect their new income level, but will not include a one-off payment for the earlier part of the year. At the end of the year, their award will be finalised when their actual income is known. If they have been underpaid, a further payment will then be made in the ordinary way. This measure is intended to counter the effects of families over-estimating a fall in their income.
  • From April 2007, the time allowed to report a change that reduces tax credit entitlement will be decreased from three months to one month, shortening the time when people are potentially being paid too much.
  • From November 2006, it will also become mandatory to report more changes in circumstances than at present. The new mandatory circumstance changes will be: ceasing to work at least 16 or 30 hours; ceasing to be responsible for a child or young person; and a child or young person ceasing to qualify for support.
  • From 2006, the deadline for the return of end-of-year information will be moved from the end of September to the end of August. This will reduce the time that recipients are being paid on the basis of information rolled forward from the previous tax year, so reducing the period which may be based on out-of-date assumptions.
  • Starting in early 2007, HMRC will contact key groups of tax credit recipients to collect up-to-date income information before the start of the new tax year. This will allow provisional payments up to the time of renewal to be set more accurately, helping to reduce overpayments.

This package of measures, when it comes into force will alleviate much of the extreme hardship that we have seen over the last two and a half years.

However, it is arguable that all this adds to the complexity of an already extremely complex system. Further changes, or much more personal help and guidance, will be necessary before the tax credit claimant feels that he or she understands the key aspects of the system.

(05-12-2005)

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