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Tax credits - In-year income rises - to report or not to report?

During February, HMRC plans to write to or telephone selected tax credit claimants to encourage them to report in-year increases in income and other changes in circumstances.

The purpose of this exercise is to help claimants manage their overpayment situation on the basis that the sooner claimants report an increase in income of more than £2,500, or any other circumstances that will decrease their award, the smaller the resulting tax credit overpayment. These calls are part of a ‘pilot’ to test what effects such calls can have in reducing tax credit overpayments.

The amount of £2,500 is the amount by which your income can go up in a tax year without affecting your tax credits award. If your income increases by more than £2,500, your entitlement is re-assessed accordingly, while ignoring the first £2,500. In his pre-Budget report in December, the Chancellor announced that he would raise this £2,500 ‘disregard’ to £25,000, but that will not affect tax credit entitlement for this year, 2005-06.

If you are contacted by HMRC in this way, and your income has indeed risen by more than £2,500, you may wonder what you should do. Should you respond by giving details of your income then and there? Should you offer to ring back? Or should you decline, but wait until you get your renewal papers after 6 April and report any income rises then?

There is no legal obligation to report income changes

The first and most important point to make is that nobody is legally obliged to report any changes in income to the Tax Credit Office. It is advisable to report a decrease in income promptly so as to secure the higher tax credit entitlement; but whether or not you should report an increase in income above £2,500 depends on a number of factors:

1. At what time of the tax year the increase happens, or when in the year you report it. Because any income change for tax credits averages out over the whole tax year, an increase occurring early in the year and reported quickly can result in only a small clawback or no clawback at all. But the size of the clawback can grow substantially if it occurs, or is notified, later in the year. Hence many people who report income rises late in the year find their tax credits drastically reduced, or even stopped, for the last few weeks or months.
2. Whether under the rules in COP26 you can get additional payments if your tax credits are reduced. When HMRC discovers during the year that you are likely to accrue an overpayment or have accrued one already, they can reduce your payments so that they end up paying you the right amount by the year-end. In other words, the overpayment is automatically recovered at a rate of 100%. If this causes hardship, you can request additional payments which will restore your tax credit payments to a percentage of what they were before. You can check whether you will be eligible for additional payments, or ‘top-up, by looking at COP26. But bear in mind that even if you secure top-up payments, you may well experience a temporary cash flow problem in the meantime.
3. If you choose to leave it until after the year-end to report an income increase in your renewal papers, any resulting overpayment will be recovered from your continuing award at a rate that reflects your ability to pay. The rates are set out in COP26. This is usually more to your advantage than reporting in-year.


Next year the situation will alter because your income will have to go up by more than £25,000 in-year before the level of your current award is affected, so fewer people will be affected by the rules on income changes. Also the 100% recovery rule is to be abolished from November 2006.

Provisional payments for 2006-07

It has to be said that there are advantages in reporting your income changes, both this year and next, before the end of the tax year because this will ensure that your provisional payments for the start of the following year will be set at a more accurate level.

However, for this year, the loss of your tax credits for the period from now to 5 April, when HMRC recover 100% of any overpayment, will be your more immediate concern if you are on a tight budget. We do not see why claimants should not, instead, phone HMRC immediately after 5 April, when they will know their final income figure for 2005/06 with more certainty, and then get their payments for the start of 2006/07 set at a more realistic level.

Contact Name: Robin Williamson (Tel: 0844 579 6700 , Fax: 0844 579 6701)

(26-01-2006)