Presentation on theme: "What next for tax credits? April 2011 www.litrg.org.uk."— Presentation transcript:
What next for tax credits? April 2011 www.litrg.org.uk
Major changes to the tax credits system were announced in both the June 2010 emergency Budget and the October 2010 Comprehensive Spending Review. The changes will be introduced over the next three tax years, 2011- 2012, 2012-2013 and 2013-2014. The purpose of this presentation is to highlight the key changes, what they mean and what impact they will have on tax credits claimants. Finally we will give a brief update on other changes that are relevant to the tax credits system.
The following changes have been implemented from 6 April 2011 for the 2011-2012 tax year. 1.The second income threshold has reduced from £50,000 to £40,000 1.The withdrawal rate has increased from 39% to 41% 1.The ‘slow taper’ rate increased from 6.67% to 41% 1.The baby element ceases from 6 April 2011 1.Those aged 60 or over can qualify for WTC at 16 hours (not a Budget or CSR announcement) 1.The Child Tax Credit (CTC) child element has been increased by £180 above indexation 1.Help with childcare costs has been reduced from 80% to 70% 1.The income disregard has been decreased from £25,000 to £10,000 1.CPI has been used to up-rate elements instead of RPI 1.The basic and 30 hour elements of WTC have been frozen. We explain briefly the impact of each of these changes on the next slides.
Reduction of the second income threshold & change to the slow taper rate Under current rules, families receive the full family element until their income reaches at the ‘second income threshold’. In 2010-2011, for most people that threshold was £50,000 although for some it may have been higher. From 6 April 2011, this threshold reduces to £40,000 for most. Above this threshold, the family element (£545 per year) is withdrawn. In 2010-2011 and earlier years it was withdrawn at a rate of 6.67%, or £1 for each £15 of income above the threshold. For this reason it was often termed the ‘slow taper’ as it was much slower than the main 39% ‘fast’ taper. From the 6 April 2011, the taper will increase from 6.67% to 41% (the same as the main rate). What does it mean? The reduction of the second income threshold to £40,000 means that the family element will be withdrawn for some families lower down the income scale than in previous years. The increase in the second taper rate to 41% means that the family element will be tapered much quicker. Who will it affect? There is no general rule here as it will depend on the family’s circumstances. Some families getting the family element only (£545) will lose it completely, others will see a reduction in the amount they receive.
Increase in the withdrawal (taper) rate From 6 April 2011, the main taper rate will increase from 39% to 41%. The first step in the tax credit calculation is to work out the maximum possible entitlement. This maximum (not including the family element) is then reduced when household income starts to go above certain thresholds. The WTC threshold is £6,420 (for those entitled to WTC only or WTC and CTC) and CTC threshold is £15,860 (Note that this has decreased from 2010-2011 when it was £16,190). What does this mean? Above these thresholds, maximum entitlement was reduced by 39p for each £1 that household income went above the relevant threshold. From 6 April 2011, it will be reduced by 41p for each £1 of income. Claimants will therefore lose tax credits at a quicker rate as their income increases Who will this affect? Most claimants will be affected by this. Anyone with income at or below the thresholds will not be affected, nor will anyone in receipt of income support, pension credit, income- based jobseeker’s allowance or income-related employment and support allowance (unless they are in receipt of these benefits during the four-week run-on).
Changes to the elements of tax credits To find the maximum entitlement of a household, a number of elements need to be added together. Each element has a different qualifying criteria. Baby element In previous tax years, families with a child under the age of one received an additional element called the ‘baby element’ worth £545 on top of the family element. The baby element was tapered in the same way as the family element (when income reached the second income threshold). The baby element stopped on 6 April 2011. It should be noted that this applies to all claims, even those families who had received it for less than 12 months. No claims from 6 April 2011 will include the baby element. People aged 60 or over Prior to 6 April 2011, if you didn’t have children or qualify for the disability or 50+ elements, you needed to work at least 30 hours per week to claim WTC. This change means that you can qualify for tax credits (the basic element of WTC) if you are aged 60 or over and work at least 16 hours per week. This is a welcome change, although advisers should be aware of the potential interactions with pension credit and the possibility that a circularity situation may be created. Freeze on the basic and 30 hour WTC elements and CPI up-rating From 6 April 2011, elements will be up-rated using CPI rather than RPI which is generally less generous. The basic element of WTC and the 30 hour element of WTC will both be frozen at their current rates for the next 3 years. This will impact on all WTC claimants, but especially those who are single and qualify by working at least 30 hours.
Childcare element of working tax credit One of the changes that will hit families hard is the reduction in help with childcare costs. Couples who both work at least 16 hours per week (unless one is incapacitated, in prison or hospital) and lone parents who work at least 16 hours per week can claim the childcare element. Prior to 6 April 2011, this element provided help with the costs of registered or approved childcare of up to 80% of the maximum set amounts which are £175 per week for one child and £300 per week for two or more children. From April 2011, this help is reduced to 70% of those maximum set amounts which means up to £122.50 for one child and up to £210 for two or more children. Those who received the full 80% of their costs prior to April 2011, will have to pay the 10% difference themselves. Even though some claimants may not be being paid any childcare element (because their income is high enough to see it tapered away), they may be received more child tax credit than they would be as a result of including childcare in the calculation. Families who receive less than 80% of their costs will therefore see a reduction in their award. One important point to note is the interaction with childcare vouchers. The reduction from 80% to 70% means that the calculation used to determine whether someone is better off receiving the childcare element of WTC or taking childcare vouchers has also changed. There will be a group of people who are currently better off with WTC who may find they will be better off taking vouchers in the future. Given the complexities, a calculation will need to be done in each and every case. The reduction in the childcare element will be offset slightly by the above indexation increase in the child element of CTC.
Decrease in the income disregard Each time a tax credit award is calculated or re-calculated, it must be done using the claimant’s ‘relevant income’. This could be one of three figures and is determined by applying a test set out in the Tax Credit Act 2002. If current year income is greater than previous year income by no more than the disregard, the relevant income is the previous year income. If current year income is less than previous year income, the relevant income is the previous year income. If current year income is greater than previous year income by more than the disregard, the relevant income is the current year income less the disregard. Having a disregard essentially means that rises in income between previous year and current year income don’t impact a claim until the following year. In the early years of the tax credits system, the disregard was only £2,500 which led to a large number of overpayments where claimant’s had a rise in income above that amount. In 2006/07, the disregard was increased to £25,000 which subsequently led to a fall in overpayments of around a third. For 2011-2012, the disregard will be decreased to £10,000. It is likely that this will lead to a increase in the number of income related overpayments, although not to such levels as those in the early years. However, the disregard is due to decease again to £5,000 in 2013-2014. At this point it is much more likely that there will be a rapid rise in income related overpayments. It should be noted that the new £10,000 disregard will be applied when calculating 2011-2012 awards. Finalisation of 2010-2011 claims will take place using the £25,000 disregard.
Impact of the changes in 2011-2012 Many tax credits claimants will be affected by more than one of the announced changes in 2011-2012. This means that it is not straightforward to calculate the potential impact of each of the changes. In addition, an increase or decrease in tax credits could have a knock on affect to means-tested benefits which need to be considered, alongside changes to the tax system, in the overall impact on a families net income. Example Sharon is 23 and has one child aged 2. She was left by her former partner, who does not support her or her child. She has been working almost full-time at just above the national minimum wage in the local supermarket. She pays childcare costs of £150 per week. Situation in 2010-2011 Sharon would have received around £12,300 of WTC and CTC. Situation in 2011-2012 Sharon will receive around £11,758 of WTC and CTC. Changes to tax credits There is a loss of tax credits of £542. Sharon suffers a substantial loss due to the reduction in support for childcare costs from 80% to 70%. This affects her WTC amount (although paid with CTC). In addition, her tax credits are tapered award much quicker at 41% in 2011-2012 rather than 39% in 2010-2011. The reduction in the second income threshold doesn’t affect Sharon as she receives the full family element due to her low income. However, these losses are partially offset by the above average increase in the child element of CTC.
Changes in 2012-2013 The following changes are due to take place from April 2012: 1.Family element will be withdrawn immediately after the child element 2.The 50+ element will be withdrawn 3.The CTC child element will be increased by £110 above indexation 4.Backdating will be reduced to one month for initial claims and changes of circumstances which increase an award 5.An income disregard of £2,500 will be introduced for decreases in income 6.Continued freeze of the basic and 30 hour elements of WTC 7.Couples with children will be require to work at least 24 hours per week to qualify for WTC (with at least one person working at least 16 hours per week) We discuss some of these changes in the following slides.
Withdrawal of the family element immediately after the child element Under current rules, families receive the full family element until their income reaches at the ‘second income threshold’. In 2010-2011, for most people that threshold was £50,000 although for some it may have been higher. From 6 April 2011, this threshold reduces to £40,000 for most. Above this threshold, the family element (£545 per year) is withdrawn (at a rate of 41% for 2011-2012) From April 2012, the family element will be withdrawn immediately after the child element of CTC. What does it mean? The second income threshold that currently exists means that the family element of £545 is guaranteed until income reaches at least £40,000 in 2011-2012 (for some people it is guaranteed at much higher incomes). The change means that from April 2012, this protection will cease, and the family element will be tapered away at 41% as all of the other elements are. It will be the last element to be tapered away after the child element of CTC. Who will it affect? Most people who get the family element will see a change to their award. Those who have a second income threshold above £40,000 will not see a change as they already have their family element withdrawn immediately after the child element. The examples on the next slide show how this will impact on the tax credits entitlement of two families. At present it is possible say that everyone with income under £40,000 will receive at least the family element worth £545. From April 2012, it will no longer be possible to say this and the cut off point will vary for all claimants depending on their income and circumstances. For a single person with one child and no childcare, tax credits will be tapered to Nil fairly low down the income scale (in the low £20,000’s) whereas a couple with 3 children and childcare costs may still receive tax credits at income of £50,000.
Example 1 David and Vanessa have two children, age 3 and 6. David works full time, while Vanessa stays at home with their children. They have no childcare costs. David’s income is £35,000 (yearly income since 2009/10) 2010/2011 entitlement: £545 2011/2012 entitlement: £545 2012/2013 entitlement: £Nil The family received £545 in 2010/2011 because their income was below the £50,000 threshold and therefore the family element was not tapered in any way. In 2011/2012 their entitlement remains the same because their income is below the new threshold of £40,000. In 2012/2013 their entitlement is reduced to Nil. This is because from April 2012 no distinction is made between the family element and other elements, so the family element no longer has protected status until income reaches a certain level. Instead it is tapered away immediately after the child element of CTC. Example 2 Gavin and Gloria have two children, age 7 and 12. Gavin works full time, while Gloria stays at home with their children. They have no childcare costs. Gavin’s income is £41,000 (yearly income since 2009/10). 2010/2011 entitlement: £545 2011/2012 entitlement: £135 2012/2013 entitlement: £Nil The family received £545 in 2010/2011 because their income was below the £50,000 threshold and therefore the family element was not tapered in any way. In 2011/2012 their tax credits fall because the family element is only protected until income reaches £40,000 (for most). Above this amount it is tapered away at 41% and so as the family have £1000 of income over this threshold they see the £545 reduced by 41p for each £1 of that £1000 excess. In 2012/2013, their entitlement is reduced to Nil for the same reason as David and Vanessa.
Introduction of an income disregard for falls in income The previous slide explained the income disregard in relation to increases in income. The Tax Credits Act 2002 has always contained a provision which allowed HMRC to introduce a disregard for falls in income, but until now this power has never been used. Currently, if income falls as compared to the previous year, tax credits can be adjusted immediately so that the claimant receives an amount based on their new (lower) income. Claimants do not need to wait until the end of the year to report a fall in income, they can do so at any point in the year and HMRC will, if appropriate, adjust their tax credits. The new disregard means that tax credits will not be adjusted until income falls by more than £2500 as compared to previous tax year income. Example Annie, a lone parent, is paid £12,000 a year, but loses her job in July 2012. She contacts HMRC, and re-estimates her 2012-13 income at £3,000. Her revised award will be calculated as though her revised income were £5,500, because the first £2,500 of the fall in her income will be disregarded.
Changes for couples with children Currently, couples with children need only work at least 16 hours in order to qualify for tax credits. From April 2012, this will be increased to 24 hours, with one person required to work at least 16 hours. For couples who current work above 16 hours but below 24, it will mean that one person will need to increase their hours to at least 24 per week or the other will need to start working so that their combined hours increase to 24 (with at least one working 16 hours). This will particularly impact upon families where one partner is disabled and the other is unable to work full time due to caring responsibilities for their disabled partner and the children. It was confirmed in the CSR documents that couples who also qualify for the disability element will not be required to meet this new criteria. The change also means that where childcare costs are claimed (under the exception which allows childcare to be claimed where one person works at least 16 hours and the other is incapacitated), the childcare element will also be lost where the new rule is not satisfied. We have urged HMRC to introduce an exception in this situation when they come to legislating for it. For those who current work above 16 but below 24 hours, they will lose WTC altogether unless they increase their hours. At an income of £10,000 this could be a loss of around £2,000 (although some of this may be offset by an increase in other benefits). One point to note is that if a family receive the severe disability element they will lose not only their WTC but also part of their CTC.
Other issues affecting the tax credits system TC1015 letters HMRC have new powers that allow them to write to certain claimants who are nil award cases or who will become nil award cases as a result of the changes to the system, telling them that their claim will not be renewed unless they respond to the letter within 30 days. These letters will be sent in April and May 2011, with the deadline for response in the latter part of May. Claimants should think carefully before leaving the system, especially if their income may fall at a later date or they are entitled to the disability element. Full details can be found on our Revenue Benefits website: http://www.revenuebenefits.org.uk/tax-credits/guidance/how-do-tax-credits-work/the-yearly- cycle/renewals/#auto Error and Fraud Strategy DWP and HMRC have published a joint error and fraud strategy. As a result, HMRC have increased their compliance work and are carrying out a large number of compliance checks on claims. This error and fraud strategy has also impacted on their policy for issuing claim packs and pre-award checks.
Other issues affecting the tax credits system - continued Universal Credit Universal Credit will be replacing WTC and CTC. UC is due to be introduced in October 2013 taking over new claims for out of work benefits. From April 2014, no new claims will be allowed for tax credits. Between April 2014 and October 2017 existing tax credit claimants will be transferred to UC. Despite publication of the Welfare Reform Bill, much of the detail is not yet known. What is apparent is that certain circumstances will receive less money than they currently do under the tax credits system. LITRG are currently leading a sub-group of the Welfare Reform Consortium on the issue of self- employment in Universal Credit. In particular we are concerned about the proposed minimum income floor for the self-employed. Real time earnings data The foundation of UC will be the ability for DWP to receive real time earnings data from HMRC. HMRC are currently developing the real time earnings data system so that they can gather earnings information on a monthly basis.
Additional sources of information www.revenuebenefits.org.uk –An adviser’s guide to HMRC products –Covers tax credits, child benefit, child trust fund, health in pregnancy –A welfare reform section which lists all key documents relating to Universal Credit –Legislation and case law along with an extensive library of research materials –Guidance on the tax credits system including detailed guides on more complex areas such as disability, couples and the disregards –Access to tax credit leaflets both current and archived www.litrg.org.uk –40 page challenging overpayments guide that covers disputes, appeals, official error, complaints and the new debt management time to pay arrangements. http://www.litrg.org.uk/Resources/LITRG/Documents/2011/03/LITRG_challenging_overpayments_adviser_guide_Version_1_Feb_2011.pdf –Overpayment guide, written in conjunction with Advicenow, for tax credit claimants. http://www.litrg.org.uk/Resources/LITRG/Documents/2011/03/Dealing_with_Tax_Credit_overpaments.pdf