LITRG explains tax and tax credits issues which may confront the increasing numbers of people taking part-time employment.
Changes in Working Patterns
The economic climate remains difficult and recent official figures show that more people are turning to part-time work. This could be by choice (such as parents returning to work) or out of necessity from being unable to find full-time employment. Employers struggling to keep businesses afloat may also have been forced to ask employees to work fewer hours for a fixed, or perhaps indefinite, period.
We have previously outlined the actions that individuals might need to take in a series of articles on Taxationweb (links below), but this article takes a look specifically at the issues for part-time employees.
Individuals need to review their position to make sure any relevant changes in circumstances are dealt with, so that:
- they receive everything they are entitled to; and
- they avoid adverse consequences by failing to report a change – for example, a tax credits overpayment.
More information on all of the topics covered in this article can be found in the ‘useful links’ section below.
So What do you Need to Know and What might you Need to Do?
Tax
Employees who move to part-time hours with the same employer should not need to take any action provided their Pay As You Earn (PAYE) Code is correct, as the system should automatically recalculate the tax throughout the year.
But if, say, you have left one job and moved to another, you might need to take action, particularly if you have been put on an ‘emergency’ tax code. Also, you may find that your tax deductions are incorrect if you have taken on multiple part-time jobs in lieu of a single full-time job. If you have any doubt as to how your tax is being calculated or think you might be paying too much or not enough tax on your wages, we suggest you contact HM Revenue & Customs - see Tax Offices for Individual Tax - to check your tax codes.
There are also particular issues for those 65 and over, which we cover later in this article.
Tax Credits
When circumstances change, what action you might need to take depends on whether you are:
- an existing claimant whose circumstances have changed and who may need to report changes to HMRC;
- someone who has never claimed tax credits before who might now be able to claim; or
- someone who might be able to anticipate a future change in circumstances (for example, a switch from full time to part time work), who could consider making a protective claim.
Remember, you do not necessarily have to have children to qualify for tax credits! There are two types of tax credit:
- Working Tax Credit (‘WTC’); and
- 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. This should be done within one month of the change, or within one month of when you became aware of the change if later.
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.
If your hours have fallen, it could be that you are no longer entitled to WTC. Nevertheless, in some circumstances you should continue to receive working tax credit for a further four weeks under special 'run-on' provisions.
We previously welcomed the extension of these rules which now means 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 at or 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 30 or more hours per week, such as those aged 25 and over, without children, who meet the qualifying conditions for WTC.
In addition, where a couple is claiming childcare costs and both individuals are working at least 16 hours per week, if one person loses their job or their hours fall below 16 they will receive a four-week run-on of the childcare element and any other elements lost as a result of the fall in hours. The couple will still continue to qualify for basic WTC but may no longer qualify for these other elements.
It is not compulsory to notify changes in income 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.
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 or local authority welfare rights unit.
If you do report a fall in income to HMRC, you may become entitled to other 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.
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 circumstances might change (for example by anticipating a move to part-time hours), then there is an advantage in claiming tax credits now in case you need to draw on them later. This is known as making a ‘protective claim’. 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 – i.e., 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.
Pensioners and Part-Time Work
There is also a trend towards people of state pension age continuing to work. Our recent article (link below) highlighted potential confusion for pensioners with multiple sources of ‘PAYE income’ which could be pensions or wages earned from continuing employment.
Entitlement to age-related personal allowances can increase as a result of a reduction in income, so pensioners moving from full-time work will need to check they receive all that they are due.
Example: Jim
Jim is 67 and works full time on a salary of £16,000 a year. His state pension is £150 a week – it is taxed by being ‘coded out’ against his employment income. His total income is therefore £23,800 a year, which is over the threshold of £22,900 so a reduction is applied to his personal age allowance. In April 2010, he decides to switch to working only three days a week. As his income is now below the threshold, he should contact HMRC and ask them to amend his PAYE code so that he receives the full personal age allowance in 2010/11.
Some pensioners reducing their hours or stopping work altogether might find that the reduction in income entitles them to other benefits such as Pension Credit (see link below to ‘Feeling the Pinch 4’ for more information).
Additional help is on the horizon for those aged 65 and over, with December’s Pre-Budget Report proposing the extension of working tax credit to pensioners working at least 16 hours a week. Unfortunately this change is not planned until April 2011, meaning pensioners working now could miss out. We also do not know how HMRC plan to let pensioners know of the change to ensure maximum take-up.
Useful links
Feeling the Pinch? 1 - Tax and National Insurance Contributions (NICs)
Feeling the Pinch? 2 - Some Tax Saving Pointers
Feeling the Pinch? 3 - Review your Tax Credits
Feeling the Pinch? 4 - State Benefits - Help could be At Hand
Tax Credits Overpayments Guide
Guidance on Pay As You Earn (PAYE)
Tax credits 'run-on' provisions (scroll down to '4-week run-on')
LITRG article on extension of tax credits run-on
Tax credits income decreasing then increasing (see ‘Doing the sums’ - scroll down to 'income falling then rising again')
Information on passported benefits
Tax credits and childcare costs
Tax credits protective claims (scroll down to 'protective claims')
Tax credits backdating
LITRG’s article ‘Pensioners and TaxHelp for Older People’
Useful telephone numbers
Tax Credit helpline
0845 300 3900 (Textphone 0845 300 3909)
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