Memo to tax credit claimants: it's safe to return to the system

Reforms will improve a flawed scheme that left thousands of families in poverty, reports David Prosser

housands of families who have given up on the crisis-hit tax credits system should be able to start claiming much-needed money following this week's Pre-Budget Report. Charities and accountants say that the reforms announced by the Chancellor Gordon Brown will eventually restore faith in the scheme.

The most significant reform is that from April 2006, the "income disregard" will rise from £2,500 to £25,000. Currently, families claim tax credits on the basis of their income in the previous financial year. However, if it subsequently emerges that your household income in the current year is more than £2,500 higher than in the previous year, HM Revenue & Customs is entitled to reclaim the overpayments it has made.

So, for example, a family with an income of £15,000 in the 2003-04 tax year would have been paid tax credits on that basis during 2004-05. If their income in 2004-05 rose to above £17,500, the Revenue would have ruled they had been overpaid credits and begun clawing back the extra money.

The system has caused many families extreme hardship, particularly in cases where the Revenue has been very aggressive in clawing back. The National Audit Office said in October that the Revenue had overpaid £2.2bn of tax credits in 2003-04, even though many families had tried to report increases in income during the tax year.

Once the income disregard rises in April, the Revenue will ignore income rises of up to £25,000. It estimates that 95 per cent of increases will fall within the new allowance - even where people move from part-time to full-time work, a major reason for overpayments.

Accountants say the move should reassure people. "This is a very welcome change. It means most recipients of the credit will not have to repay it even if their income increases," says Colin Ben Nathan, a tax partner at KPMG. The change reflects "recent serious difficulty in administering the tax credit system," he says

However, overpayments will not disappear altogether. According to Revenue figures, only half the overpayments made in the past have resulted from income increases. Many have been caused by changes in circumstances: claimants stopped working the minimum hours required for the work element of Working Tax Credit, for example, or childcare costs changed.

Katie Lane, a tax credits expert at Citizens Advice, says this is why the charity is particularly pleased that there will be limits on the amount of money that can be clawed back when overpayments are identified.

Currently, a bizarre dual system operates. If the Revenue discovers it has been overpaying tax credits in the current financial year, there are no limits on how much it can claw back. As a result, some families have been overpaid during the first half of the year and then had their credits stopped altogether during the second half.

However, if the Revenue identifies overpayments made in a previous financial year, it is not allowed to claim any more than 10 per cent of the credits you are currently receiving. So if you get £100 a week, the maximum you can lose is £10.

Following the Pre-Budget Report, from November next year, this latter rule will apply on current-year overpayments too. "That will ensure that where overpayments do still occur, people are not left without money to live on," Lane says.

Citizens Advice says it will continue to campaign for better communication from the Revenue on how credits are calculated. However, the charity is keen to reassure families who have been so scarred by their experiences that they are no longer making claims. "People should be encouraged by these measures," Lane says.

Who can claim tax credits?

* Families may be eligible for two types of tax credit - the Child Tax Credit and the Working Tax Credit.

* The first is available to families with children, whether the parents work or not. Families with household incomes of up to £58,000 can claim, though the size of the credit reduces the closer you are to this limit.

* This year, families earning up to £50,000 get the family element of Child Tax Credit, worth at least £545 a year. Families with incomes below £13,910 can claim a further element worth £1,690 a year per child, falling for higher incomes.

* The Working Tax Credit is aimed at people who work - whether or not they have children - and is paid through your employer. The basic element is worth up to £1,620 a year. Families can claim further help of up to 70 per cent of childcare costs if both parents work at least 16 hours a week.

* Tax Credit Helpline (0845 300 3900); the Revenue website (

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Arts and Entertainment
Lou Reed distorted the truth about his upbringing, and since his death in 2013, biographers and memoirists have added to the myths
musicThe truth about Lou Reed's upbringing beyond the biographers' and memoirists' myths
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the Apple Watch for you? Well, it depends if you want it for the fitness tech, or for the style
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

    Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

    £50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

    Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

    £13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

    Ashdown Group: Training Programme Manager - City, London

    £40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

    Day In a Page

    NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

    Who's monitoring the outsourced NHS services?

    A report finds that private firms are not being properly assessed for their quality of care
    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
    How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

    How do Greeks feel about Syriza?

    Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
    From Iraq to Libya and Syria: The wars that come back to haunt us

    The wars that come back to haunt us

    David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
    Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

    Too busy to surf? Head to The Pool

    A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
    Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

    UK's Major Tum to blast off on a spice odyssey

    Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
    John Harrison's 'longitude' clock sets new record - 300 years on

    ‘Longitude’ clock sets new record - 300 years on

    Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
    Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

    Let the propaganda wars begin - again

    'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
    Why Japan's incredible long-distance runners will never win the London Marathon

    Japan's incredible long-distance runners

    Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
    Why does Tom Drury remain the greatest writer you've never heard of?

    Tom Drury: The quiet American

    His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
    You should judge a person by how they peel a potato

    You should judge a person by how they peel a potato

    Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
    Beige is back: The drab car colours of the 1970s are proving popular again

    Beige to the future

    Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
    Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

    Bill Granger cooks with fresh cheeses

    More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
    Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

    Shay Given: 'This FA Cup run has been wonderful'

    The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
    Timeless drama of Championship race in league of its own - Michael Calvin

    Michael Calvin's Last Word

    Timeless drama of Championship race in league of its own