Tax credit changes set to shock
Many couples, especially those on higher incomes, no longer qualify for tax credits from 6 April 2012.
Although some tax credit elements have increased, the income thresholds have not been increased in line with inflation and this means that even lower-income couples do not gain in real terms.
Rate increase:
The child element has been increased in line with the consumer prices index, but the main working tax credit rates and relief for childcare are unchanged, with the exception of the disabled worker tax credit rates.
Income thresholds:
The £40,000 family element second income threshold has been removed, and the family element is now withdrawn along with other elements. For 2011/12, a couple earning £39,000 with one child, not paying childcare, would have received the full family element of £545. This year they are not entitled to anything. The other income thresholds are unchanged, more than cancelling out the benefit of the child element increase.
Disregard for income fall:
A fall in income of less than £2,500 is now ignored. For example, if income last year was £22,000 and forecast income for 2012/13 is £20,000, entitlement is still based on £22,000. The reduction will not be taken into account until 2013/14. Also, the first £2,500 of any larger fall is disregarded. Although a fall under £2,500 has no immediate impact, it should still be reported promptly to HMRC to avoid an underpayment at the start of 2013/14.
Backdating:
It was possible to backdate a claim by up to three months, but the time limit is now just one month. This limit applies when making an initial claim, or notifying HMRC of a change of circumstances that increases an award – such as the birth of a child or paying extra childcare costs. Even though a couple’s income may initially be too high to qualify for tax credits, it might be wise to make a protective claim, for example, in case of an unexpected redundancy.
Other changes:
With some exceptions, a couple with children now needs to work a joint 24 hours a week to qualify for working tax credit. The minimum was previously 16 hours. The additional payment is no longer available for people aged 50 or over who return to work.
Most of these changes were announced in the first Coalition Budget in 2010. The only outstanding point is that the disregard for increases in income will fall from £10,000 to £5,000, and this will happen next year. If you are concerned that these changes will affect you, please contact us as soon as possible.