TAX CREDITS: Explanation of the £25k disregard

olgadapolga

I’m a bit confused about the tax credits £25k disregard, and whether I’m entitled to it or not!

My situation is that for the last few years I’ve been a student, also running a small, mainly unprofitable business (with the odd good year) on a self-employed basis – this business started out as a bit of a hobby and wanting to help others as opposed to a, shall we say, meaningful business. The reason I did it on a self-employed basis was that I wanted to declare it to the Inland Revenue so that all of my income would be above-board. My partner has been caring for our children and doing the odd job here and there, also on a self-employed basis. We also get a bit of interest on our savings. I am due to start full-time employment on Monday.

The income we declared last year (for our tax credits renewal etc) was literally £28. When I renewed over the phone, I was asked what I thought our income would be for this year, to which I responded probably about the same as last year (at this point I had no idea that I would be able to secure a job, being as I’d been told at university that jobs would be scarce). I have just checked our award notice for this year, and it states that “the income we have used to calculate your tax credits is £28”.

My question is am I entitled to the £25k disregard on income? I am due to start work on Monday – my income for the remainder of the tax year will be well below the £25k disregard but I cannot give an accurate figure to the Tax Credits Office as I will be getting extra payments for unsocial hours (which will vary from week to week).

I don’t even know if this makes sense. I’m worried about it as in the past I have estimated our income and ended up with an overpayment. That, combined with a mistake that the Tax Credits Office made, resulted in us having a £4k overpayment which has taken the last 4 years to pay off and I am not keen to be in that position again!

I suppose that I should just ask the Tax Credits Office but thought that someone here might know before I ring them.

Thanks in advance.

[Deleted User]

Everyone has the £25k disregard so you can earn up to £25,028 without having been overpaid or having your current year entitlement reduced. You should, however, give a more accurate current year estimate if possible as they will use the estimate from 6th April 2010 to calculate your new award. They will use the estimate until you have completed the renewal with the correct figures.

olgadapolga

Hi subsoniccoyote,

Thanks for the reply, it's a bit clearer now!

So the only reasons I need to advise the Tax Credits Office now is to a)avoid an overpayment from April 2010 and b) tell them that I shall be employed and the hours I shall be working?

TIA

[Deleted User]

Yes for both. If in doubt, make sure to call them when anything changes.

johnjay_3

Can anyone tell me what happens if you earn more then the £25000 disregard? My tax credits were assessed on a very low income last year, I have managed to get a decent paid job and It's likely I will earn more than the disregard. Probably by around £1000-2000. Will an overpayment be made on the whole amount (£26-27000) or the amount that's over the disregard?

Thanks in advance

[Deleted User]

Tell them now how much the income is going to be so that they can adjust your award now.

Any amendment/overpayment still disregards the £25k.

Example:
2008/09 income was £8,000.
2009/10 income will be £35,000.
The income increases by £27,000 but as £25,000 is disregarded the 2009/10 award will be based on £10,000 [£8,000 + £2,000 (£27k - £25k disregard)]
Any overpayment would only be based on te £2,000 above the £25k disregard.

johnjay_3

Thank you subsoniccoyote. I thought this may be the case but just wanted someone else's opinion. :T

[Deleted User]

There always seems to be a bit of confusion over the £25k disregard for tax credits so I have tried to give an explanation using examples.

If I have been unclear or there's something that's a bit confusing just ask in this thread and I will try my best to answer you.


Explanation of the £25k disregard

Note: CY = current year & PY = previous year

You can earn up to £25k more in CY than you did in PY without it reducing your CY award or causing a CY overpayment.

Example 1:
PY income £15,000 & CY estimated income £35,000
Your CY award will be based on £15,000 as the CY estimate is within the £25k disregard. You award for CY+1 (next year) will be based on the £35,000 estimate until you provide the actual income details when you complete your renewal.

Example 2:
PY income £15,000 & CY estimated income £10,000. You then declared an actual income of £10,000 when you receive your renewal at the end of CY.
Your award would have been based on the CY estimate £10,000 and would have increased to more than what it was previously as your income has obviously reduced. As you declared this income at the end of the year there will be no overpayment.

Example 3:
PY income £15,000 & CY estimated income £10,000. You then declare an actual income of £12,000 when you receive your renewal at the end of CY.
You will have been overpaid as you under-estimated your income. Your award would have been increased as it would have been based on the £10,000 instead of the £15,000 but then you actually earned £2,000 more than your estimate. The overpayment will be calculated between the £10,000 & £12,000 figures.

Example 4:
PY income £15,000 & CY estimated income £10,000. You then declare an actual income of £20,000 when you receive your renewal at the end of CY.
You will have been overpaid as you under-estimated your income. Your award would have been increased as it would have been based on the £10,000 instead of the £15,000 but then you actually earned £10,000 more than your estimate and £5,000 above your PY income. The overpayment will be calculated between the £10,000 & £15,000 figures. The overpayment will only be calculated on the difference between the PY income of £15,000 and your under-estimated figure of £10,000 (which is £5,000) as you still have the £25k disregard over and above the initial £15,000.
This means you could have actually earned £40,000 and still only have been overpaid the difference between awards calculated on £15,000 and £10,000.


Example 5:
PY income £15,000 & CY estimated income £15,000. You then declare an actual income of £13,000 when you receive your renewal at the end of CY.
You may be due an underpayment as your award was based on £15,000 but you declared just £13,000 which is £2,000 lower. The underpayment would likely be around £780.



I have previously advised that if you under-estimate your income you “lose” the £25k disregard but that’s not really the case but is sometimes easier to explain it that way as it is quite complex to explain. So as I said, you don’t have it in the first place between a lowered CY estimate and the actual PY income. You still do have the £25k disregard – but only on the income earned above your PY actual income.

newnhak

Thanks for this. I wish I had known this before. If I had I would have given an estimate higher than the previous year for my 2007-2008 claim as I lost my job that year and had loads of filler contract jobs which meant I had no idea what my final income would be. If I had declared just a little higher they would have not ended up overpaying me - I would rather be underpaid than overpaid. Personal choice I know but if the rules were explained better you could make that choice yourself. I have asked CTC to explain before but no-one has been able to

Also i have rung them before with a lower figure than previous year becasue i thought it was best to try and give them an accurate figure as possible - I didnt realise they then use that figure (again never explained). In future I am not going to update them with a lower figure unless it is very different to the previous year.

pingua

Oh I still don't get this.

So,we are both self employed. We are always overpaid so to avoid this do we need to just keep over estimating a little bit or keep it the same??

Cinque-mummy

Sorry, but I'm still confused ... We've not claimed child tax credits before the 09/10 tax year because our income was too high. However, at the beginning of 2009 my husband lost his job so from April 09 we became eligible to to claim. At that time he had no work, so we based our claim on my pretty low self-employed earnings, plus an allowance for the odd bit of contract work he was picking up. Since then he's had a three month self-employed contract, which might be extended for another 3 months. By my rough reckoning, if his contracts do carry on, we will have underestimated our income by about £11,000, but, equally, his contract could be cancelled tomorrow and our original estimate won't be that far off if he didn't manage to replace it.

Because we have no previous year's income to go on, what would they base any overpayment estimate on? I should mention that they have already withheld £2000 from the award because our figures are estimates.

We really won't have a clear idea of our income until the end of the tax year - should I tell the tax credit office that at the moment our income looks higher than our original estimate and have our credits reduced? But what would then happen if hubbie's contracts aren't renewed? Will they up the credits again? Is there anywhere that I can calculate what we might have been overpaid? Any help really gratefully received.