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In this third in a series of four articles covering important issues for those whose household incomes have fallen in the ongoing recession, the Low Incomes Tax Reform Group advises on Tax Credits.

Introduction

In this third in a series of four articles covering issues to consider if you have been affected by the recession, we look at tax credits.  The article provides links to more detailed guidance on the Low Incomes Tax Reform Group’s (LITRG) website or other external websites such as DirectGov and a list of relevant contact numbers which you may find helpful.

Broadly, there are three different cases to consider:

1. Existing claimants whose circumstances have changed – reporting changes to HMRC;
2. People who have never claimed tax credits before who might now be able to claim; and
3. Those who might be able to anticipate a future change in circumstances (for example, where redundancy is threatened), who could consider making a protective claim. 
   

One common misconception is that you have to have children to qualify for tax credits – that is not the case, as there are two types of tax credit:

1. Working Tax Credit (‘WTC’); and
   
2. Child Tax Credit (‘CTC’).

Claimants may qualify for one or both types; the two are claimed using the same form.

Existing claimants

It is important that with any change in circumstances, you consider your tax credits position and there are certain changes which must be reported to the Tax Credit Helpline. Do this within one month of the change.

Losing your job is a change that must be reported, as is any change in the normal pattern of your working hours if it means you were working 30 or more hours a week, but are now working less than 30; or you were working 16 or more hours, but are now working less than 16. 

HMRC have introduced new guidance for people who are being laid off temporarily or indefinitely.

Although the full impact of this new guidance is not entirely clear, it appears that if you are laid off or have a fall in hours that will last 4 weeks or less, there will be no interruption to your normal working hours. Thus tax credits will continue as normal. If you are told after these 4 weeks that there is still no work for you or your hours will continue to be lower, you are treated as stopping work or switching to those reduced hours from that date (subject to the 4 week run-on below).

However if you are laid off or have your hours reduced for more than 4 weeks or indefinitely, the change will become effective immediately.
 
If your hours have fallen, it could be that you are no longer entitled to WTC. Nevertheless, if your normal working hours fall below 16 a week, or you stop work altogether, you should continue to receive working tax credit for a further four weeks under special 'run-on' provisions (scroll down to '4 week run-on').

A welcome change announced in this year’s Budget and effective from 31 July 2009 is that the four week run-on payment will also cover people who lose their entitlement to WTC because of a change from full time to part time working.  This means that people whose working hours fall to below 30 per week, but remain above 16 hours per week, will qualify for the four week run-on. This will benefit those who only qualify for WTC if they work more than 30 hours per week, such as those aged 25 and over without children who meet the qualifying conditions for WTC.
 
In addition, where a couple are claiming childcare costs and both are working at least 16 hours per week, if one person loses their job or has a fall in hours below 16 they will receive a four week run-on of the childcare element and the 30 hour element (if applicable). The couple will still continue to qualify for basic WTC but will no longer qualify for either of these two elements.
 
Changes in income are not something that you must notify to the Tax Credit Office, although it is often in your interest to do so. If you remain in work but your income has gone down, you should consider telling the Tax Credit Helpline as this may increase your award; but – take care – if you over-estimate the reduction in your income you could be paid too much in tax credits which you might have to pay back later (see Doing the sums - scroll down to 'income falling then rising again').

It is also important to be aware that changes in your tax credit award can mean changes to other benefits such as housing benefit and council tax benefit. In some cases you could be better off by waiting to notify HMRC of a change in income due to the interactions with other benefits. If you are claiming other benefits, we recommend that you seek advice from a welfare rights adviser so that you receive the best advice for your situation - try contacting your local Citizens Advice Bureau.

If you do report a fall in income to HMRC, you may become entitled to passported benefits such as help with health costs.

Remember also that most childcare costs affect your entitlement to WTC. If a change in circumstances means that your childcare costs have changed, again, make sure you report it.  Childcare costs will also now be included in the four week run-on payment.

There is an unfortunate side-effect of losing your job and ceasing to receive WTC. Unless you are continuing to receive child tax credit, any prior overpayment debt which was being spread forward becomes due and payable within 30 days. You should resist demands for immediate payment and ask for it to be spread over at least 12 months or longer if your circumstances necessitate it. You can also ask for the debt to be deferred or written off if you are experiencing hardship.

New claimants and protective claims

Even if you remain in work (and with too high an income to be paid tax credits) but you feel your job may be at risk, then there is an advantage in claiming tax credits in case you need to draw on them later. This is known as making a protective claim - scroll down to 'protective claims'. This way you will secure a nil award which can later be revised for the whole period of the award if necessary. Otherwise, if you leave it until you have fallen on hard times before claiming, your award can only be backdated by three months.

If you are in this latter situation – ie if your circumstances have changed and you are making a new claim – you may need to ask for your award to be backdated as in some cases this is not done automatically. 

You should also consider making a protective claim if you are self-employed, in case your profits fall.

Useful telephone numbers

Tax Credit helpline
0845 300 3900 (Textphone 0845 300 3909)