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LITRG explain HMRC’s forthcoming run of letters withdrawing claimants from the tax credits system unless urgent action is taken on receipt. Read their guide below if you receive one.

HMRC letters to 1.8 million tax credits claimants

Within the next few weeks, some 1.8 million tax credits claimants will receive a letter from HMRC (designated TC1015). The letter will warn them that their claim will not be renewed this year, but will lapse from 6 April 2011, unless they contact HMRC by phone or letter within a specified time telling them that they want to renew for 2011/12.

Those 1.8 million claimants will be those who have been on a nil award (ie not receiving any tax credits because their income is too high), and those who were receiving something last tax year but are now on a nil award because of the cuts in tax credits taking effect from 6 April.

The importance of considering your position

It is very important that claimants consider their response to this letter carefully. For those who have made a conscious decision that they want to leave the tax credits system, not responding to the letter can provide a safe and convenient way of doing so.

But the consequence could be that if your income falls unexpectedly during the current tax year, and you need to make another claim, you will only be able to backdate your claim by three months. If instead you had responded to the letter saying that you want to renew your claim, and had done so within the deadline set, the increase in your entitlement could have been spread back to the beginning of the tax year.

In other words, leaving the system in this way could cost you money.

This is a consequence of the way tax credits work. They are not like traditional benefits, which base entitlement on a person’s income at a particular point in time. Instead, tax credits look at a person’s income for the tax year as a whole. Any award made during the year is provisional only; nobody can tell what their actual entitlement is until the tax year is over, when all changes in circumstances and income are reviewed to produce a final figure.

Disabled workers

Also, if you are currently entitled to the disabled worker element of working tax credit (WTC), and your entitlement rests on the fact that you have been claiming the element for some time, not responding to the letter could mean that you will lose that entitlement for any future claim. A gap of more than 56 days before you claim again will mean that entitlement to the disabled worker element will fall away.

The practical implications for claimants

In summary, if your income is likely to fall during the current tax year (eg you are expecting to be made redundant, or are self-employed and can foresee difficult times ahead) – or even if you don’t expect any change in your income but want to be covered in case of anything unforeseen – you should respond to the notice TC1015 within the time limit saying that you do want to renew your claim for 2011/12.

If you are currently entitled to the disability element of WTC, even if you are not actually receiving anything at present, you should respond to HMRC’s letter in order to preserve that entitlement should you need to make another claim.

Owing to pressure from LITRG, HMRC’s letter does explain some of these matters in outline.

The changes in tax credits from April 2011

These are the changes which could cause a reduction in the amount of tax credits an individual is likely to receive during 2011/12 as compared with 2010/11:

• Once a claimant’s income goes above a certain threshold, their tax credits are progressively reduced by so many pence for each pound of income above the threshold. In 2010/11 that was 39p in the pound; in 2011/12 it will be 41p in the pound.
• The family element of child tax credit is not progressively withdrawn until income reaches a higher figure. In 2010/11, that ‘second income threshold’ was at least £50,000; for 2011/12, that minimum amount has come down to £40,000.
• In 2010/11, the percentage by which the family element was withdrawn above the second income threshold was 6.67% (ie £1 in every £15). Thus, a claimant whose tax credits, apart from the family element, had tapered away by the time their income reached £50,000 would see their family element disappear when their income reached £58,175. In 2011/12, the family element is tapered away at 41p for each pound above the revised second income threshold of £40,000. Thus, a claimant in a similar situation in 2011/12 will see their family element disappear at an income level of £41,330.
• The childcare element of working tax credit enables a claimant to recoup a certain percentage of eligible childcare costs. That percentage was 80% in 2010/11, but is cut to 70% in 2011/12.
• The basic and 30-hour elements of working tax credit are frozen at 2010/11 levels for both 2011/12 and 2012/13.
• The ‘baby element’ of child tax credit (the doubling of the family element for a child under one) is abolished for 2011/12.
• The amount by which a claimant’s income can exceed the previous year’s income without it affecting their award (the ‘income disregard’) was £25,000 in 2010/11, but will be £10,000 in 2011/12. That will not affect any income increases that took place during 2010/11; awards for that year will be finalised using the £25,000 figure.

As against those cuts, the child element of child tax credit increases markedly in 2011/12 (from £2,300 in 2010/11 to £2,555 in 2011/12). Also, a claimant aged 60 or over can claim working tax credit after working for at least 16 hours a week (previously 30, unless the claimant also had responsibility for a child, or was entitled to the disabled worker element or the 50+ element).

Useful links

The LITRG website offers more guidance on tax credits.
Revenuebenefits.org.uk – a partnership website between LITRG and rightsnet – provides further tax credits help for advisers.