Get tax credit claim in early

Waiting until the end of the tax year to make new tax credit claims could see people whose income has fallen miss out, advises Gary Vaux 

In the years following the introduction of tax credits, millions of claimants and even more millions of pounds were under- or over-paid, mostly down to Revenue and Customs inefficiency and a fairly lousy IT system. It put many people off claiming at all.

Yet, during this recession, it’s vital that families and low-paid workers (including many social care staff) should claim the tax credits they are due. The system is also being tweaked to be more responsive and the administration has improved vastly – yes, honestly, it has.

Anyone who loses a job, or reduces their hours to less than 16 a week, keeps any existing working tax credit award for the following four weeks. In addition, from 31 July this will be extended to cover people who reduce their hours to less than 30 a week but more than 16.

The run-on also covers the child care element, including for couples when only one partner stops working. Don’t forget, though, that working tax credit counts as income for means-tested benefits, such as housing or council tax benefit, but doesn’t affect the contributory versions of jobseekers allowance or employment and support allowance.

Reassessments

People can also ask for their tax credit award to be reassessed if their income falls, be it a loss of regular overtime or bonus payments, a cut in their hours, or if one person in a couple has lost their job.

They need to ask the Revenue to review their tax credits on a “current year” basis. Normally, tax credits are based on the previous year’s earnings, so this could lead to an immediate increased payment.

Another option is to wait until the end of the tax year to report the change. This involves being “underpaid” during the year so some people won’t be able to afford that option. But if they can, there is a knock-on effect with housing benefit (HB) and council tax benefit (CTB).

For example, if a person asks for their tax credits to be increased because their pay has reduced, their HB and CTB will increase because of the lower income but decrease because of the extra tax credits.

If, however, they can afford to wait until the year-end, their HB will still increase during the year because of the reduced wages and won’t be affected by the extra tax credit, which will be paid as a lump sum at the year’s end.

Anyone whose income has fallen may find too late that they could have qualified for tax credits for the whole year, when previously their expected annual income was too high.

Don’t lose out

Waiting until the end of the tax year to make a new claim could mean losing out, because claims can only be backdated three months. So it’s often advisable to make what is known as a “protective” claim early in the tax year. Even if it’s turned down, it means it can be reviewed if the income ends up being less than estimated.

For example, Bob is a single self-employed painter. He usually earns £30,000 a year so doesn’t get Working Tax Credit. At the start of this tax year though, he put in a WTC claim that was refused. But he only ends up earning £11,000 in 2009-10, low enough for him to get WTC of £17 a week.

If he’d waited until the end of the year to make his claim, he’d only receive three months’ backdated. By making the “protective” claim, he gets his WTC backdated to the date of his original failed claim.

So anyone who is in a fairly well-paid job today (remember, the cut off for child tax credit can be as high as £66,000) but who thinks they might be having a much lower income in the coming year (ie, any of us!) might want to look at making a “protective” claim now.

Gary Vaux is head of money advice at Hertfordshire Council. If you have a question for him please e-mail lauren.revans@rbi.co.uk

This article is published in the 2 July issue of Community Care magazine under the heading Tax credits come into their own