A summary of what’s changing and some HMRC guidance
From 6 April 2011 there will be a number of changes to tax credits (working tax credit (WTC) and child tax credit (CTC)).
Below we give the Tax Faculty's summary of what’s changing. The Government announced these changes in the June 2010 Budget and at the time of the autumn Spending Review. We reported on them in our Budget Supplement and news items at the time.
HMRC has recently published a useful summary page Tax credits: effect of Budget changes from 6 April 2011 which lists the April 2011 changes, provides links to further information and also offers some examples of how the changes will affect claimants.
Tax credit changes from 6 April 2011
Increases in rates: Most elements of WTC and CTC have been uprated for 2011/12 by the Consumer Price Index (CPI). Some have remained unchanged.
See the full list of 2011/12 tax credit rates and thresholds
Extra increase in child element of the CTC: The child element for 2011/12 will be £2,555, which represents a big increase about indexation.
WTC frozen for three years: From April 2011, the basic (£1,920) and 30 hour (£790) elements of WTC will be frozen for three years.
Income disregard: From 6 April 2011 the income disregard will reduce from £25,000 to £10,000 for 2011/12. The disregard is the amount by which income can rise in one tax year compared to the previous year before a tax credit award must be revised.
Upper income limit reduced to £40,000: From 6 April 2011 families with household income above £40,000 will start to have their family element tapered away. Currently the upper income limit is £50,000.
Withdrawal rate increased to 41%: From 6 April 2011, the withdrawal rate for tax credits where income exceeds the first income threshold will increase to 41% from 39%.
Withdrawal of family element of CTC: From 6 April 2011, the withdrawal rate for the family element of CTC (where income is above the upper £40,000 threshold) will be 41%, increased from the current 6.67%. In other words, there will be one flat rate of withdrawal for all credits, 41%.
Baby element of CTC withdrawn: Currently families who have a child aged under one get an additional £545 added to the basic family element but this will be stopped from 6 April 2011 (even if the claimant was getting this payment in 2010/11 and the child is still under the age of one).
WTC working hours reduced for those aged 60+: Those aged 60 and over will qualify for WTC if they work at least 16 hours per week (rather than 30 as currently required).
Credit for 70% rather than 80% of childcare costs: From April 2011, the proportion of childcare costs covered by the childcare element of WTC will be reduced to 70%, from 80%. The weekly maximum qualifying amounts are unchanged.
Changes planned for 2012 and later
Income disregard: From 6 April 2013 the income disregard will reduce again, from £10,000 to £5,000.
Disregard for falls in income: From 6 April 2012, there will be a new feature in the system – an income disregard of £2,500 for falls in income. Currently, if income falls by any amount as compared to the previous year, tax credits are adjusted so that the claimant receives an amount based on their new (lower) income. The new disregard means that tax credits will not be adjusted until income falls by more than £2,500 compared to the previous year
Withdrawal of family element of CTC: From 6 April 2012 the family element will start to be withdrawn immediately after the child element. Currently, the family element is protected from withdrawal until income reaches the upper income limit.
Child element of CTC: The Government will again increase the child element of CTC by above indexation in 2012/13.
The 50+ element of WTC: This will be removed from 6 April 2012. The 50+ element means that people aged 50 or more can qualify for WTC by working at least 16 hours for the first year when they return to work after receiving certain benefits.
Working hours requirement for couples: From April 2012, couples with children must work 24 hours between them, with at least one working 16 hours, to gain entitlement to WTC. At present, couples with children qualify for WTC if at least one of them works 16 hours a week or more.
Backdating: From April 2012, backdating of a new claim or of an increased award following a change of circumstances will be limited to one month. Currently the maximum period of backdating is three months.
Using real time PAYE information in tax credits calculations: HMRC will link the proposed new PAYE system, whereby a central computer can keep a real-time record of changes in individuals’ earnings, to the tax credits system.
Universal credit: From 2013, tax credits will start to be phased out and will be replaced by the new universal credit.