This £2500 allowance

TCannoyed

on Tax Credits can someone explain what happens regarding the £2500 that is mentioned on the forms.
i.e you say you earned £15k. They send you an award based on this amount. Then you dont have to tell them about changes if the amount you earn is no more than £17.5k.
What happens if i had earned £17k. Do i keep the award they give me based on earning £15k? Or do they get the money back the following year?
Totally confused.

Fran

They will reassess you the following year and take back the overpayment they will have made by your £2,000 extra that you earned. If you have a change of £2,000 it's worth you telling them anyway. Also you'd need to make sure that you have enough to deal with any overpayment when it occurs so keep it to one side.

chinagirl

Fran wrote:

They will reassess you the following year and take back the overpayment they will have made by your £2,000 extra that you earned. If you have a change of £2,000 it's worth you telling them anyway. Also you'd need to make sure that you have enough to deal with any overpayment when it occurs so keep it to one side.

Now that is interesting. I feel I should now have told when I upped my hours at work and my wage went up. I noted the £2500 buffer zone, so did not bother. It looks like I might be penalised for this. I bet I am not the only one who misread this!

Ms-Money-Penny

Fran wrote:

They will reassess you the following year and take back the overpayment they will have made by your £2,000 extra that you earned. If you have a change of £2,000 it's worth you telling them anyway. Also you'd need to make sure that you have enough to deal with any overpayment when it occurs so keep it to one side.

I've only just found out about this when my payments were reduced by £19.00 a week - going to have to find a job with more hours now to compensate.
This is unfair as i have always kept them up to date with any changes to my pay and this is the first time this has happened.

So my moneysaving "savings" are no more

CIS

I think people get the wrong end of the stick with this, you are allowed a £2500 increase of income without accruing any overpayment
ie

2003/04 earned £20000
2004/05 earned £23000
2005/06 earned £25000

2004/05 award is not more than £2500 greater than 2003/04 therefore award uses income of £20000, no overpayments.

2005/06 looks at the actual income for 2004/05, £23000. the 2005/06 income of £25000 is not more than £2500 greater than 2004/05 actual income so award 2005/06 is based on actual income from 2004/05, £23000. Therefore no overpayments on this basis.


The £2500 allowance is actually a (generous ?) gift from the inland revenue to ease any wages increases effect on tax credits

Fran

I'm afraid you've confused me even more.

For a start, your first figures are over £2,500 more in your example.

Surely the point is that you can have a £2,000 increase during the tax year and the following year when the full income details are now known, the award is adjusted to take this into account and therefore it has been an overpayment for the remainder of the year in question? So therefore you get less than you would have done for the new tax year because of this? They don't give you anything do they? Or am I missing something?

My award for the last tax year wasn't finalised until after the beginning of this tax year. Surely when you renew any overpayment is taken off?

irs101

Hopefully I can explain this without confusing further. CIS was nearly right, just got the numbers a bit wrong.

Example 1
Person gets pays rises of less than the £2,500 limit.

I applied in April 2004. My 2003-04 income was £20,000, so my 2004-05 provisional award is based on £20,000.

By the end of 2004-05 it turns out my income was actually £22,000. But because the difference between the actual and provisional amount is less than £2,500, I don't have any overpayment.

However my provisional 2005-06 award is based on the full £22,000. So while I have no overpayment, my award for the next year is lower than last year.

This goes on year after year. So as long as the difference in income between one year and the next is less than £2,500, you'll never have an overpayment(in theory!)


Example 2
Person gets pays rises of more than the £2,500 limit.

I applied in April 2004. My 2003-04 income was £20,000, so my 2004-05 provisional award is based on £20,000.

By the end of 2004-05 it turns out my income was actually £24,000 (and I don't tell them this until the end of the year). Because the difference between actual and provisional income is more than £2,500 my final award for the year is based on an income of £24,000 less the £2,500 allowance i.e. £21,500. So I will have been overpaid by a maximum of £555 (£1,500 x 37%).

My provisional 2005-06 award is based on the full £24,000 (plus I'll lose some of my award to repay the overpayment)


So, if you increase your income, you will benefit from the £2,500 allowance in the current year, but not in the following year. The allowance is not clawed back in any way, but it's a one-off benefit in each year you get a pay rise.

Does that make it more or less clear??

irs

CIS

Thanks for that explanation, thats the way i was intending mine to be read. My maths a bit out at the minute, new baby keeping me awake.

Fran

So going on what you've said, a person who for example goes from 16 hours a week low paid work into higher paid 37 hours a week work who doesn't tell Inland Revenue can end up with quite a large difference the following year? Presumably this is the type of thing that has happened with people with larger overpayments.

If you work it back the other way though, what happens if someone has a pay cut of more than £2,500 which they don't tell Inland Revenue about?

Milarky

Fran,

When income drops from one year to the next, and you don't immediately inform the I.R. about it, they give you a rebate [as a single payment] to cover the whole year. Also, going on what the other posters have said, this lower figure then becomes the basis on the new tax year - even though it is only based on a 'past' year - the one just gone in other words.

This means that simply by a 'shift' of income between two years 'more' tax credit becomes payable than would be otherwise:

Example

'Jack'
2003-04: Income 15,000
2004-05: Income 16,000
2005-06: Income 17,000

'Jill'
2003-04: Income 15,000
2004-05: Income 14,500
2005-06: Income 18,500


Here, Jack and Jill have the same income over three years. Both have their 'interim' awards for 2004-05 based on the same figure - 15,000 - and get the same amount. But Jill's income in 2004-05 turns out to be lower than assumed. So she gets a refund based on this dip of £500 AND also gets her award for 2005-06 based on this figure.

In contrast, Jack sees his income go up to £16,000 in the second year - but this is still within the £2,500 'disregard' band. So he has no overpayment as such. Going into 2005-06, Jack's award is based on this figure - which is £1,500 higher than Jill's figure - for that year [she is now £2,000 'ahead' of him - £500 in the first year and £1,500 in the second]

When 2006-07 arrives, of course, Jill's actual earnings [of £18,500] for 2005-06 will be known. So she will have an overpayment of '£1,500' [£18,500 - £14,500 - £2,500] and her award for that year reduced accordingly.

Jack and Jill continue to have identical income, but Jill has benefited compared to Jack by the '£500' she was underpaid for one year. The '£1,500' - more than Jack - she gets in the second year - but has to 'give back in the third year.

If you think about it, one of the reasons a substantial 'disregard is necessary is because the I.R. makes an 'interim' award each year - always working with last year's income figures once these become available. If no disregard [or only quite a small one] was made then they would have to amend final awards in about 100 per cent of cases - because almost no one earns exactly the same figure from one year to the next!

The alternative approach - which they should have adopted really - is simply to go on last year's figures as 'final' [since last year's income does change, after the eventl] and 'fix' this year's award once and for all from that. Then next year's award could be fixed on this year's income once it becomes known and so on... It is because of the IR's need to 'justify' that the award you receive is based on the current tax year, therefore, that they are obliged ot introduce a very large 'fudge' factor in the form of this disregarded £2,500.

[Now what would rather chose.. being a year 'late' or being 'accurate'? You can't have both with tax credits!]

Fran

Thanks - but please sort out your Jack from your Jill!!