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Tricky tax credits

Posted in: Finance Last updated: 21 Mar 2012

It is benefit uprating time again, and that means that from 6th April we will be in a new tax year, coming to terms with yet more changes to Tax Credits. 

Tax credits - an essential supplement

To millions of people, Tax Credits are an essential supplement to earnings and child benefit. However, the system has also been criticised for its complexity, and lack of responsiveness to changing circumstances.

As a self-employed mum married to a self-employed dad – both of us with fledgling businesses, childcare costs for two children and a frighteningly variable income – I was in the ‘guinea pig era’ of tax credits when they were introduced in 2003. I battled my way through rainforests of incomprehensible forms and received more than my share of stroppy ‘you have been overpaid’ letters, largely because of the problems caused by fluctuating earnings. Despite being very tempted to withdraw my claim purely on the grounds of frustration, I have stuck with it, and tax credits have been a vital source of income over these past 9 years of growing children and spiralling living costs.

Our family is just one of the millions that will be adversely affected by the changes that are coming our way from this April and beyond.

If you need a refresher on the mechanics of tax credits and a guide to the different rules and ‘elements’, it might help to have a look the tax credits calculator to help you gauge your likely entitlement.

So, let's clarify the detail of what’s happening to Working Tax Credit (WTC) and Child Tax Credit (CTC) from this April...

Change of tax year

From 6th April, we will be in the 2012-13 tax year. Existing tax credits claimants will be contacted between April and 30th June. If you haven’t been contacted by 15th July, ring the tax credit helpline (0345 300 3900). You will usually have until the end of July to send in evidence of all your taxable income during 2011-12 and renew your claim, otherwise your tax credits will probably stop.

Backdating

If you are a new claimant, you don't have to wait until you've got your evidence to start your claim.  From this April, you will only be able to get one month of backdating, instead of three, so you can start your claim and send in evidence when you have it.

Falls in income

All decisions on tax credit awards have to be based on the previous year's gross taxable income. However, if you think your income in the 12-13 tax year is likely to drop by more than £2500, compared to the 11-12 tax year, tell HMRC straight away, as they have the discretion to work out your award using whichever income is most beneficial to you. Ignoring the first £2500 of a drop in income is a new surprise this April.

Child Tax Credit changes from April 2012

All the elements relating to children have increased this year, but the family element has stayed the same – £545 per year.

Prior to this April, the rule has always been that if you have children and a gross income of less than around £40,000 per year, then you would get at least the family element. In effect, the £545 has always been a protected amount for those earning under about £40k. From this April, that ceiling is removed, which reduces quite drastically the number of people who can claim CTC.

For example: In 2011, Henry and Amy, who have 2 children, earned £39,000 between them and during the 11-12 tax year they received £545 CTC. In 12-13, with the same level of income, they will get nothing.

According to HMRC, the cut-off point will be about £26,000 if you have one child, and about £32,200 if you have two. However, the cut-off point will vary according to the number of children, if there are any disabilities in the family, or if there are childcare costs, so always get your entitlement checked out first – don’t assume you can or can’t qualify.

Working Tax Credit changes from April 2012

From April 2012, there are two significant changes to WTC

People aged 50 plus
There is now no special route to WTC for people aged 50+ who have been previously unemployed. The ‘50+ element’ is abolished, and workers aged 50-59 will have to work at least 30 hrs p/w unless they are parents or disabled.

Couples who are working parents
Couples with dependent children will no longer be able to access WTC on the strength of one person working 16 hours p/w.

This is a very significant change which will affect many working parents. The new rule requires 24 hours of work: if one person is working, they must work a minimum of 24 hrs p/w, or if both partners are working, one of them must be working at least 16 hours p/w.

Lone parents
Lone parents are still able to access WTC by working 16+ hours per week; it is just couples that are caught by the new rules.

If this is likely to affect you, it’s a good idea to get advice from the tax credit helpline in order to avoid any potential overpayment problems arising.

The Future of Tax Credits

The Welfare Reform Act 2011 has just been passed which will eventually abolish tax credits completely and replace them (and many other benefits) with a brand new benefit, called Universal Credit, which will begin in October 2013. It’s therefore vital to make sure that your tax credits are in good shape, to ensure a seamless transition from the old system to the new. I will be telling you all about Universal Credit in my next blog.

Happy new tax year!

Note: Whilst we take care to ensure Hub content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions. OneFamily do not provide advice so it may be worth speaking to an independent financial advisor about your own circumstances.