Tax credits only based on previous year's income?

wolvoman

Why are tax credits based on previous full year figures and not expected current year figures?

For example in 2014/15 if you earn £50,000 and pay nothing as pension contributions then you're not entitled to tax credits in 2015/16.

But if in 2014/15 you made £30,000 of pension contributions then you would be entitled to tax credits, but only in the following year 2015/16.

wolvoman

But can you still claim tax credits on your expected level of income in 2015/16, or is it entirely based on the previous year's income.

In other words, if you have a drop in income you have to wait a whole year to claim tax credits?

Edinburgh65

The sooner that they tighten up this Tax Credits nonsense the better. I am horrified reading this thread, which seems to suggest that someone on a £30k salary can get government top ups, and worse still is even mentioning a £50k salary in their thread. This country has gone to the dogs.

dori2o

wolvoman wrote: »

But can you still claim tax credits on your expected level of income in 2015/16, or is it entirely based on the previous year's income.

In other words, if you have a drop in income you have to wait a whole year to claim tax credits?

Whilst it is true that the initial award for the year would usually be calculated based on the previous years income you can contact HMRC and provide them with an up to date estimate of the household income.

If this new estimate is more than £5k higher than, or more than £2.5k lower than the previous years income then the award would be recalculated immediately and a new award issued.

If the estimate was less than £5k higher/£2.5k lower than the award would not be amended as this falls within the 'Income Disregard'.

If your income is going to be more than £2.5k less than the amount the award is being based on then you can call them straight away and give them a estimate for this year.

wolvoman

blondebubbles wrote: »

No, as I explained, if the current year income increases by £5000 or decreases by £2500 then they will use that figure (subject to the disregard as shown in my example).

The claim form asks for your previous year income. Once the claim is processed you get an awards notice which asks you to report any changes including income.

Ahh that makes sense.
This will be the first time I have made a tax credit claim, so to date there's no change as such.

Any idea how long it takes from asking for the form to getting an awards notice?

And I presume that they will still issue an awards notice even though mine will be for zero because last year's income was above the threshold for tax credits?

wolvoman

Edinburgh65 wrote: »

The sooner that they tighten up this Tax Credits nonsense the better. I am horrified reading this thread, which seems to suggest that someone on a £30k salary can get government top ups, and worse still is even mentioning a £50k salary in their thread. This country has gone to the dogs.

Actually those weren't the real figures.
In theory someone earning well over £100k could claim tax credits.

It's perfectly legal.

dori2o

wolvoman wrote: »

Actually those weren't the real figures.
In theory someone earning well over £100k could claim tax credits.

It's perfectly legal.

They'd have to have an army of kids or be making significant pension contributions/charitable donations to make a claim with that much income.

michaels

Doesn't seem to be anything stopping you paying pension contributions to bring your income down to zero for tax credits purposes if you can afford it and have enough rollver allowance left, although the most tax efficient salary sacrifice route is limited by NMW.

wolvoman

To confirm I just received a cheque for underpayment of tax credits in 2015-16 of over £6,000.

I used an 85% salary sacrifice to my company pension to achieve this.

The tax savings are phenomenal.
My pension pot was boosted by nearly £100k in just 1 year (I had some carry over allowance).
But it only cost me a loss of about £45k in take home pay.

AND the government gave me back £200 for married couples allowance.
AND they gave me over £6k in tax credits.
AND they allowed me to keep child benefits worth another £1,700.

And it's all perfectly legal

pcman1985

dori2o wrote: »

Whilst it is true that the initial award for the year would usually be calculated based on the previous years income you can contact HMRC and provide them with an up to date estimate of the household income.

If this new estimate is more than £5k higher than, or more than £2.5k lower than the previous years income then the award would be recalculated immediately and a new award issued.

If the estimate was less than £5k higher/£2.5k lower than the award would not be amended as this falls within the 'Income Disregard'.

If your income is going to be more than £2.5k less than the amount the award is being based on then you can call them straight away and give them a estimate for this year.

The income increase disregard is now £2.5K, not £5K, so it's the same as the income fall disregard.

Darksparkle

pcman1985 wrote: »

The income increase disregard is now £2.5K, not £5K, so it's the same as the income fall disregard.

Now yes but the original question was about 2014/15 and 2015/16 which was £5000 for an increase.