Tax credits changes in 2012 - the facts

Published on 5 April 2012

From tomorrow, the already very complicated tax credits system is undergoing more changes. Overall this will result in a second round of tax credits cuts, although not everyone will lose out. This article explains those changes in more detail.

Several changes to the tax credits system were announced in the June 2010 Emergency Budget and the October 2010 Comprehensive Spending Review. Some of those changes started from April 2011, with others due to start from tomorrow (6 April 2012).

There are two main points that people should be aware of:

  • There is no one income cut-off point for tax credits. It is based on your individual circumstances and takes into account lots of factors.
  • There are several changes to the system all happening at once, and the impact will depend on your individual circumstances. Only by looking at all of the changes together and their effect on your overall entitlement will you be able to determine whether you are better off or worse off in 2012-2013 compared to 2011-2012.

Changes for workers

The basic, 30-hour and couple elements of working tax credit (WTC) remain frozen at their 2011-2012 level.

50+ element

The 50+ element, paid to those aged 50 or over who return to the job market working at least 16 hours a week after receiving certain out of work benefits, is abolished. This applies even to those who have not received it for the full 12 months.

To continue to qualify for WTC, people who were getting the 50+ element will need to work at least 30 hours a week and even then they are likely to see a significant fall in their payments. The exception to this is if they are responsible for children, aged 60 or over or qualify for the disability element of WTC in which case they may continue to qualify by working at least 16 or 24 hours depending on their circumstances.

Couples with children

Perhaps the biggest change will be for couples with children who have up to now received WTC by working at least 16 hours a week. From 6 April 2012 they are required to work at least 24 hours between them, with one person working at least 16 hours. If they don’t they lose their WTC, although child tax credit continues. This could be a loss of up to £3,870 for those on the lowest incomes. Some of this loss may, however, be offset by increased claims to other benefits such as income-based jobseeker’s allowance, housing benefit, council tax benefit and free school meals.

There are some important exceptions to this new rule. Couples with children can continue getting WTC by working at least 16 hours a week if the person who is working is aged 60 or over or entitled to the disability element of WTC.

In addition, there are four exceptions to the 24-hour requirement. If one partner works 16 hours a week and the other is:

  • incapacitated (in receipt of certain benefits or credits due to ill health),
  • in prison,
  • in hospital, or
  • entitled to carer’s allowance,

they will still receive WTC. However, their payments will stop from 6 April unless they contact HMRC, via the tax credits helpline, to tell them that one of these exceptions applies.

Finally, couples where one partner works at least 16 hours and the other is entitled to carer’s allowance are now entitled to claim help with their childcare costs whereas previously they each needed to be working at least 16 hours.

Other changes for claimants with children

The child element of child tax credit (CTC) increases by 5.2% which should offset some of the more negative changes. Similarly generous increases apply to the amounts for disabled and severely disabled children.

In previous years, higher earners could continue receiving the full "family element" of CTC - £545 per annum - until their annual income reached the "second income threshold". For most people, this was £50,000 until the last tax year, when it dipped to £40,000 for 2011-2012. For some people, the second income threshold was higher than this.

For 2012-13 it is removed altogether. This means that as soon as income reaches the point at which all other elements of tax credits have been withdrawn by the 41p in the pound taper, the family element also starts to be withdrawn at the same rate.

Consequently, many households who were earning £40,000 or slightly more during 2011-12, and who still received at least some of the family element, are finding themselves without tax credits in 2012-13.

However, those with larger families could still be entitled to some payment, as could those who spend a lot on formal childcare or who have children with disabilities.

A recent HMRC letter, trying to remove those who may not receive payments from 6 April 2012 due to the changes, stated that the CTC limit was £26,000 for single and joint households. We explain in another article why this is not the case and why it only applies to those with one child who claim no childcare costs and have no disabilities. The income cut-off is different for everyone and those with larger families, who spend a lot on formal childcare or who have members entitled to the various disability elements, could still be entitled to some payment at much higher income levels. You can see some useful tables showing the maximum cut off points for different circumstances on our advisers’ website Revenuebenefits.

Some examples

A family with two adults (both working full time) and two children but no childcare costs, with an income of £25,000 a year, will receive:

  • £2,697.20 in 2011-12
  • £2,967.20 in 2012-13

If their household income was £40,000 they would receive:

  • £545 in 2011-12
  • Nil in 2012-13

Now assume their household income is £40,000 and they are paying childcare costs of £300 a week. Their awards are now:

  • £7,467.20 in 2011-12
  • £7,737.20 in 2012-13

So families with children and/or paying for childcare can still gain in 2012-13 compared to 2011-2012, even if they are on comparatively higher incomes.

Other changes for all claimants

Another controversial and complicated change is the new "disregard" for falls in income. HMRC has always had the power to fix a disregard for falls in income, but this is the first time they will have used that power.

This means that if your income drops by no more than £2,500 from one year to the next, the fall is disregarded and your award does not rise. If your income decreases by more than that amount, the first £2,500 of the fall is disregarded when assessing your new award.

Example

Annie, a lone parent, is paid £12,000 a year but loses her job in January 2013. She tells HMRC about her fall in income, and re-estimates her 2012-13 income at £9,000. Her revised award will be calculated as though her estimated income were £11,500, because the first £2,500 of the fall in her income will be disregarded.

The disregard for increases in income - within which the tax credits award remains the same and is not reduced - remains at £10,000 for one more year, then falls to £5,000 in 2013-14.

Finally, when making an initial claim or notifying a change of circumstances that increases an award (such as the birth of a child or a material increase in childcare costs), from April 2012 claimants are only able to backdate the increase in their entitlement by one month, not three months as hitherto. This means that claimants now only have one month to make a claim or report a beneficial change of circumstances if they are not to lose out on any entitlement.

(05-04-2012)

Contact: Victoria Todd (please use form at http://www.litrg.org.uk/ContactUs)