Tax credits and the £25k extra income disregard?

kpwll

My daughter and her partner got caught in this trap because he changed his job last August to a better paying one, she rang and informed them at the time but this year they have to pay an overpayment back for last year because they earned more than was estimated at the time they filled in the renewal form last year. (I hope that makes sense to you, lol).

bestpud

I think I may be worrying about nothing anyway! I think I need a brain transplant! :rolleyes:

I thought I had actually lowered the income but I'm not sure I did, and if I did, then it was only the estimated income for this year. But that would not matter as the estimate was still higher than last years income, I'm guessing?

I've rang to check this morning but the system is being updated and they can't access it to give me any information, so I will ring back Monday.

In the meantime, I looked at entitled to, to try and work out which figure they were using (last years or the estimate) and it doesn't seem to be either! It is between the two though so I can at least see it is not based on anything lower than last years income, than goodness!

I think my confusion has stemmed from my thought processes at the time, as opposed to what I actually did!

The estimate I gave was lower than the estimate I'd have given if he'd stayed with his old employer, but not lower than last years income.

So, I think I filled in the form with the higher estimate (I do this before I ring) and then lowered it (in my mind) while I was renewing over the phone - so I thought I had actually given a figure lower than last year when in fact I gave a figure lower than our original prediction for this year!

I'm sure that makes no sense to anyone but me!

I will check Monday but I am assuming we will be ok if it is still based on last years income, or something in between?

Put it this way - if I have done anything else, then I have no new award for it and I have no record of the call - and that would be very unusual for me.

I'll check for definite in Monday though and postpone any mini-panics until I know what I am talking about!

An aside, why do they take the estimate? Is it just in case it may be higher than £25k? Or do they base next years provisional award on this years estimate (if it is higher than last years final income)?

Thanks again for your replies.

bestpud

kpwll wrote: »

My daughter and her partner got caught in this trap because he changed his job last August to a better paying one, she rang and informed them at the time but this year they have to pay an overpayment back for last year because they earned more than was estimated at the time they filled in the renewal form last year. (I hope that makes sense to you, lol).

Was that because they went more than £25k over though? Or did they drop their income when they renewed in April because of a change in circumstances?


I'm really interested to know the rules in this, even if it doesn't apply to me any more. It just seems unfair if people have drop in income, due to a job change, and then find a better job, or one of them starts working,or whatever later on. How can it be ok to take away the disregard when they had a change in circumstances?

I can see how it would apply if there was no change but people just gave a lower estimate (plucked from a hat) to get a higher award, bit not if there was a definite change around the time of the renewal, iyswim?

JessicaF_2

You don't actually lose the disregard (technically) because you never have it if you give a current year estimate.

If you look at the legislation quoted above:

Awards made for all or part a year will be assessed initially on a previous year income (PY) basis. Awards will be re-assessed where the current year income (CY) is different to the PY income.

1. If the current year income (CY) is less than the previous year income (PY) the current year income will be used.(CY)

Tax Credit Act section 7(3)(e).

1. If the current year income (CY) is more than £25,000 higher than the previous year income (PY) the income used will be the current year income (CY) minus £25,000.

Tax Credit Act section 7(3)(b)

1. If the current year income (CY) is less than £25,000 higher than the previous year income (PY) the income used will be the previous year income (PY).

Initially tax credits will be based on Previous year income. If you ring tax credits and give them an estimate they will apply the tests above.

If that estimate is lower than the PYI - your award becomes based on current year income. No disregard is needed because your income has not risen.

If that estimate is higher than PYI then the award remains on PYI because you have the benefit of the disregard.

The disregard allows a rise between previous year income and current year income.

In your example, you are saying you give a lower estimate of CYI. Your award becomes based on that. You don't need a disregard because your income has fallen. If your income rises again (i.e. the estimate was too low) the disregard does not kick in again until your income starts to rise above previous year.

The simple reason is because the disregard is only there to cover when your income rises as against previous year.

So it isn't that you have lost the disregard, it is that the disregard only ever operates when CYI is above PYI. In the scenarios you are talking about, CYI is lower than PYI so there is no disregard.

It isn't an easy concept to grasp, but it is one that often gets people into an overpayment situation.

If you think about it, it really couldn't operate any other way. If you allowed the disregard to work when you gave a lower estimate, everyone would ring up and say their income was going to be £10,000 when previous year was £30,000.

Also, income for tax credits is apportioned evenly across the year. This means that if you are on a salary of £10,000 for the first 6 months (and paid TC based on this) and move to a new job of salary £30,000 for the 2nd 6 months, your tax credits for the whole year will be adjusted to be based on £20,000 - so technically for the first 6 months you may be overpaid - of course this depends on previous year income but it is a simplified example.

J

[Deleted User]

Thanks Jess, better explaination than I was able to give

bestpud

JessicaF wrote: »

You don't actually lose the disregard (technically) because you never have it if you give a current year estimate.

If you look at the legislation quoted above:

Awards made for all or part a year will be assessed initially on a previous year income (PY) basis. Awards will be re-assessed where the current year income (CY) is different to the PY income.

1. If the current year income (CY) is less than the previous year income (PY) the current year income will be used.(CY)

Tax Credit Act section 7(3)(e).

1. If the current year income (CY) is more than £25,000 higher than the previous year income (PY) the income used will be the current year income (CY) minus £25,000.

Tax Credit Act section 7(3)(b)

1. If the current year income (CY) is less than £25,000 higher than the previous year income (PY) the income used will be the previous year income (PY).

Initially tax credits will be based on Previous year income. If you ring tax credits and give them an estimate they will apply the tests above.

If that estimate is lower than the PYI - your award becomes based on current year income. No disregard is needed because your income has not risen.

If that estimate is higher than PYI then the award remains on PYI because you have the benefit of the disregard.

The disregard allows a rise between previous year income and current year income.

In your example, you are saying you give a lower estimate of CYI. Your award becomes based on that. You don't need a disregard because your income has fallen. If your income rises again (i.e. the estimate was too low) the disregard does not kick in again until your income starts to rise above previous year.

The simple reason is because the disregard is only there to cover when your income rises as against previous year.

So it isn't that you have lost the disregard, it is that the disregard only ever operates when CYI is above PYI. In the scenarios you are talking about, CYI is lower than PYI so there is no disregard.

It isn't an easy concept to grasp, but it is one that often gets people into an overpayment situation.

If you think about it, it really couldn't operate any other way. If you allowed the disregard to work when you gave a lower estimate, everyone would ring up and say their income was going to be £10,000 when previous year was £30,000.

Also, income for tax credits is apportioned evenly across the year. This means that if you are on a salary of £10,000 for the first 6 months (and paid TC based on this) and move to a new job of salary £30,000 for the 2nd 6 months, your tax credits for the whole year will be adjusted to be based on £20,000 - so technically for the first 6 months you may be overpaid - of course this depends on previous year income but it is a simplified example.

J

I understand why it is in place i.e. to prevent people lowering their income deliberately. That makes perfect sense.

I also understand that it doesn't come into play if the cyi actually stays at the estimated amount.

However, when people have given an estimated income which is lower than their pyi, because of a legitimate change in circumstances e.g. change of job/lost job etc (at the time of the renewal) and so they are acting because their income has actually lowered due to their circumstances (NOT because they have simply decided to lower it and get a higher award), then it is wrong to say they no longer have access to the disregard if their income happens to go over the estimate during the year.

None of us can predict these things, can we? And that is why the disregard was introduced in the first place!

So, to make this clear:

I am not talking about people with no change in circumstances, who ring up and give a lower estimate and therefore are given a higher award.

I am talking about people who did have a lower income at renewal because their circumstances have changed. BUT they then go on to earn more, or get a better job, or one of them start working etc etc (all those things the disregard normally allows for.

In the latter case, they do lose the disregard they'd have had if not for the first change in circumstances, that actually happened around renewal time and before they gave their figures in good faith.

Can you see they are entirely different circumstances and, given this is not clearly covered in any of the paperwork, it is not surprising people are unaware of it?

I hope that makes my query clearer?

ETA: thinking some more about this - should people not lower their income, even if they believe the change to be permanent, just in case they have another change during the year (and one which the current system was set up to allow for)? So, essentially, they have to wait until the following April (a year!) and take an underpayment just in case...

And, if the disregard kicks in once the rise gets above the pyi, does that mean it is only the difference between the estimated cyi and pyi that accrues an overpayment?

JessicaF_2

I absolutely understand what you say, and it is something that the helpline could do more to explain to people, so that they understand.

But it links to the fact that tax credits are annual and based on an annual income.

So in your example, because income has gone down and gone up again, the final assessment of tax credits is based on your total annual income. If the annual income has risen to more than previous year, you will still get some benefit from the disregard, but not from the rise between your lower estimate and your actual income for that year.

So it isn't the disregard rules that are causing problems in these situations, but the fact that tax credits are considered annually.

I think what you are saying is it would be fairer to pay tax credits based on actual earnings at the time....so when your income really falls your tax credits increase, then when your income goes back up your tax credits decrease. In fact they spread it evenly over the year which means you end up with an overpayment.

If you allowed a disregard in the situation you describe - would that not lead to people getting more tax credits than others who had the same income all year?

So for example - you have £30,000 previous year income. You estimate £10,000 for current year. Your award is changed to £10,000. Half way through the year you get a new job and report that you are now on £20,000 salary. Your income for the year will be finalised on £15,000 - but since you were paid for the first 6 months on £10,000 you will have an overpayment.

I think from what you are saying, you think there should be a disregard when you report the £10,000 (because of a genuine change) up to the £15,000 that you finally report. So your award would still be based on £10,000, even though your annual income was actually £15,000 for the year.

Would this not be unfair to someone who had say £15,000 previous year income and £15,000 current year income. You would get more tax credits for the year than they would even though your household income over the year was the same?

Sorry if I have misunderstood, and for the record I completely agree with you - I am just really interested in what you think should happen :-)

EDITED TO ADD: In answer to your last two questions - yes it is always safer to leave the award on PYI and get the underpayment at the end. But if you take a fall in income, it is more likely you will need the increased tax credits.

Secondly - yes you will get the disregard back again as soon as CYI rises back to the level of PYI so you don't lose it completely.



J

bestpud

Ah, right, your last answer makes it clearer. I was thinking the person would be repaying anything they were awarded for income over and above their estimated amount, and that seemed very unfair to me.

I can understand it kicking back in at the pyi level, but it does still seem unfair - just less so iyswim.

The trouble is, tax credits are unfair anyway, in many respects. I would never wish a return to the original system but it is entirely wrong that someone can get tax credits based on a £10k income and yet get a new job in May and actually earn £34k over the course of the year.

So, as much as people could 'play the system' with my example, they can do so anyway, but in a different way.

I'm not sure what 'should' happen tbh. I feel somewhat more comfortable with only the difference being counted as an overpayment.

It's always difficult I guess and, yes, you are correct in saying many could simply not afford to wait a year for their entitlement.

I don't think it applies to us now anyway, but I can honestly say we did not anticipate the rise we've had in income when I gave the estimate.

Thanks for taking the time to explain. :beer:

kpwll

No they didn't go over £25000 (they wouldn't have minded paying back if they did), just that because they stated in their yearly review that their earnings would more or less be the same as the previous year and they ended up being approx £4000 more, then they were judged to have been overpaid.

bestpud

kpwll wrote: »

No they didn't go over £25000 (they wouldn't have minded paying back if they did), just that because they stated in their yearly review that their earnings would more or less be the same as the previous year and they ended up being approx £4000 more, then they were judged to have been overpaid.

If this was in the last two years (post April 2006) then I don't think they should have received an overpayment under those circumstances?

Certainly not if they said their income would be the same as the previous years.

They should check it out imo and see exactly where the overpayment is supposed to have come from. Tax credits do get it wrong sometimes so it is always worth checking.