Tax credits shock

[Squidpinky]

I am trying to work out whether I am being or have been thick or whether the system is so wrong?!

We have been on the old system of tax credits (paid weekly based on your annual income) for about 7 years now. Our income has hardly changed but this year it has.

My husband was made redundant shortly after lockdown and as the highest earner we took a massive cut. I then had to up my hours at my job to full time to become the main earner. My husband was out of work for a while then landed a job which is way more money than he was on before. Tidy I thought - we would no longer need tax credits as our annual income was above the threshold (both full time) Kids are both now at school so thought we would be better off.

I phoned the tax office to tell them about my husbands new job and our new annual income. I was told that we would probably owe the tax office thousands because of this as we had been paid up until now (April 2020 - October 2020 on our old income which was right up until my husband got this new job)

Firstly I am flabbergasted that we owe the tax office thousands when it was un unplanned changed - We didnt know back in April that my husband would lose his job, I would have to go full time and then he would get a better paid job. The tax credits that we were paid meant we could afford to live on our low income but now we dont need tax credits I can completely understand them stopping our payment but why an earth make us pay back April - October?!

I have worked out that if we have to pay them back a sum each month we wont have much left over at the end of the month and would actually have been better off with me being part time and my husband working on his old wage.

Am I missing something here? Am I really entitled to pay back April - October or if you write and explain the situation do they take a view on it? Anyone else experienced similar?

[Babyroobs]

@NellWilsonsWhiteHair

It’s an impossible system. People who understand it in theory but have no/only straightforward experiences of it in practice tend not to appreciate that. The fact that you generally have to update them by phone and they send contradictory overpayment letters which don’t actually outline what information they’ve used to calculate the overpayment means you can never prove that you did the right thing and never check whether they’ve calculated correctly (even though you’re apparently responsible for their errors). I have paid back huge TC and HB overpayments which I don’t believe were actually as much as I had to pay back, using (0%) credit cards, because I find private creditors much more reasonable, polite, transparent and trustworthy than the govt. That is definitely not the right way round!

I’m on UC now and whilst I recognise it’s a system with severe flaws, for me it’s so much easier. As others have said, it’s calibrated in real time, it’s clear how they’ve calculated it each month, and I have an easy record showing everything I’ve updated them on (eg my childcare costs which vary on a weekly basis).

Uc is so much simpler. People with variable incomes can easily calculate what they will receive each month so they can plan and budget, unlike tax credits where if you did some overtime it would cause a massive overpayment at the end of the year. Like you I recognize Uc has some problems but it's a lot better for working people generally and far more simplistic.

[TulisaIsBrill]

UC has some benefits, but all sorts of flaws compared to tax credits that make it very tough for some families.

The income calculation method frequently means people are penalised for having two salary payments in an evaluation period. Ridiculous and not a problem under tax credits.

Also, UC is means tested for savings. This means a renting family who want to build a deposit to purchase a home, will immediately start being penalised once they've saved over a pathetic 6k, with their payments tapered rapidly. Once over 16k - forget it - spend that first. 16k isn't even a 10% deposit on a reasonable 'starter' home in large swathes of the county. It's almost like they don't want people to aspire for more, so they are stuck in a trap.

TC no means testing.

Tax credits was complicated, but get your round it and it was much, much better. Overpayments are easy to avoid with pension contributions and those pension contributions can almost end up 'free' when you consider effective marginal tax rates (extra income is in effect taxed at 73% under tax credits for a basic rate tax payer - and UC is even worse).

[Jowak1]

Tax credits are crap!! I informed them straight away about my changes and told them numerous times on the phone and by email that I thought they were paying me too much . I was assured numerous times the figures were correct and not too worry! Well guess what? They had been overpaying me and I needed to pay a few hundred back. Why did they not listen on the numerous times I contacted them??😠

[Smallsteps88]

I agree UC is not better for claimants. But as a recipient I do find it easier to understand exactly how much I will be getting and how those calculations are made. There’s absolutely room for massive improvement though. It won’t come from this government.

I do think there should be a ring fenced savings vehicle specifically for a housing deposit that should be exempt from the £6-16k savings deduction for UC. The help to buy ISA is a perfect example of how it can work. The money can’t be withdrawn for anything other than a house deposit without incurring a large penalty. There’s no reason why this can’t be made exempt for those in receipt of UC.

[Gatekeeper]

This happened to me a couple of years ago when I started work after being a sahm. Soon as I started work in the October I contacted them to let them know the change of circumstances and was hit 2 weeks later with an overpayment for the April to September- £1000!!!

[TulisaIsBrill]

@Smallsteps88

I agree UC is not better for claimants. But as a recipient I do find it easier to understand exactly how much I will be getting and how those calculations are made. There’s absolutely room for massive improvement though. It won’t come from this government.

I do think there should be a ring fenced savings vehicle specifically for a housing deposit that should be exempt from the £6-16k savings deduction for UC. The help to buy ISA is a perfect example of how it can work. The money can’t be withdrawn for anything other than a house deposit without incurring a large penalty. There’s no reason why this can’t be made exempt for those in receipt of UC.

Agreed. It's ridiculous that both the LISA and Help to buy ISA are included in the means testing g calculations - especially because as you said, you're penalised for accessing them!

Tbh, I think any savings should be exempt. If you can budget so that you have something left over, you should get to keep it regardless of whether you receive state support (or rather, your employer/landlord does because UC and tax credits + housing benefit are both crap employer/landlord subsidies really when you think about who it really benefits).

Otherwise where is the incentive to live within your means?

[Babyroobs]

@Smallsteps88

I agree UC is not better for claimants. But as a recipient I do find it easier to understand exactly how much I will be getting and how those calculations are made. There’s absolutely room for massive improvement though. It won’t come from this government.

I do think there should be a ring fenced savings vehicle specifically for a housing deposit that should be exempt from the £6-16k savings deduction for UC. The help to buy ISA is a perfect example of how it can work. The money can’t be withdrawn for anything other than a house deposit without incurring a large penalty. There’s no reason why this can’t be made exempt for those in receipt of UC.

But they are tweaking UC as they go along. I accept sometimes it has been slow. There has been new legislation passed this week to rectify the situation where two pay days fall in one assessment period because for example someone gets paid early for Christmas, so that people don't miss out. I think it was ill thought out but they are making changes.
I do think there should be ring fencing for a house savings deposit too but not other savings. If me and dh got made redundant today we would get nothing despite having dependent children because dh was unfortunate enough to lose both his parents and was left inheritance over 16k. Whilst I do feel a little aggrieved at this because Dh has very little in the way of a pension and we are by no means well off in the longer term, I do generally agree that if you have the means to support yourself then you should. Tax credits allowed people with potentially 100k in savings and no mortgage to claim hundreds a month just because they didn't earn much or chose to work very reduced hours. That situation was ludicrous and needed to change.

[TulisaIsBrill]

@Gatekeeper

This happened to me a couple of years ago when I started work after being a sahm. Soon as I started work in the October I contacted them to let them know the change of circumstances and was hit 2 weeks later with an overpayment for the April to September- £1000!!!

For anyone reading this. Pension payment, pension payment, pension payment. Cannot stress it enough.

[Babyroobs]

I should also add that dh has considered paying some of his inheritance into a pension fund but as he has a life limiting illness I honestly think he thinks he may not live to benefit from it.

[TulisaIsBrill]

Yes, but the fact means testing does not include the value of a home massively penalised renters with savings regardless.

You can live in a 1m house outright and get UC or TC right now. But 16k in cash? Forget it. It's horribly unfair.

Why should anyone with savings spend their money if they have been careful enough to build it up? If we are going to subsidise employees and landlords with state support for crap incomes in this manner, then it should only be based on income anyway.

[TulisaIsBrill]

@Babyroobs

I should also add that dh has considered paying some of his inheritance into a pension fund but as he has a life limiting illness I honestly think he thinks he may not live to benefit from it.

I'm very sorry to hear that. But it shouldn't stop him because if the worst did happen, which I very much hope it doesn't - it would benefit his family surely?

[PotatoesDoNotTakeBaths]

@Babyroobs

Please could you link me to the legislation where the two wages recorded in one assessment period flaw has been changed? I am affected by this and I was following the court case of the single mums who took UC to court and it was found unlawful. I've got mandatory reconsiderations pending.

I hate what the government have done with the 5 week wait for payments, you are in debt before you even start I'm still paying it off, and despite not being affected by the two child policy and rape clause, I'm particularly disgusted with that aspect, but sadly the public opinion seemed to be in favour of it.

There are some good things about UC though. I feel more able to take on overtime without having to contact tax credits and wait for recalculation. It will also benefit me if my DC stay until they are 21 because I won't get a non dependent deduction.

[Audreyseyebrows]

Welcome to the club! Loads of people have been caught out because they changed jobs or circumstances, informed tax credits and then told that they owe thousands.

[Babyroobs]

[quote PotatoesDoNotTakeBaths]@Babyroobs

Please could you link me to the legislation where the two wages recorded in one assessment period flaw has been changed? I am affected by this and I was following the court case of the single mums who took UC to court and it was found unlawful. I've got mandatory reconsiderations pending.

I hate what the government have done with the 5 week wait for payments, you are in debt before you even start I'm still paying it off, and despite not being affected by the two child policy and rape clause, I'm particularly disgusted with that aspect, but sadly the public opinion seemed to be in favour of it.

There are some good things about UC though. I feel more able to take on overtime without having to contact tax credits and wait for recalculation. It will also benefit me if my DC stay until they are 21 because I won't get a non dependent deduction.[/quote]
It is regulation 61 and is from 16th November 2020. It will not help people who are paid four weekly and have one assessment period a year where two pay days fall in the assessment period. This related just to people where employers do not correctly report when an employer is paid early. This regulation means that people can ask their work coach to reassign their RTI pay to more accurately affect their cycle of work. The intent of the policy is to ensure that ordinarily no more than one set of monthly salary payments from a single employer are taken into account in the assessment period. i will try to find a link.

[Smallsteps88]

But they are tweaking UC as they go along. I accept sometimes it has been slow. There has been new legislation passed this week to rectify the situation where two pay days fall in one assessment period because for example someone gets paid early for Christmas, so that people don't miss out. I think it was ill thought out but they are making changes.

Good news, but this was all pointed out in the years before it was rolled out. They knew it would be a problem and people would suffer, as in literally be hungry and cold, before they rolled it out. Why couldn’t it have been amended before it caused any harm?

[TulisaIsBrill]

@Audreyseyebrows

Welcome to the club! Loads of people have been caught out because they changed jobs or circumstances, informed tax credits and then told that they owe thousands.

And absolutely noone needed to be in that position.

I'll give you an example. Lets say you get a bonus of 10k.

It's unexpected and very nice. But If you 'keep' that money and told tax credits immediately, You effectively lose £7300 of that in income tax, NI and paying back tax credits (overpayment). £2700 left out of a 10k bonus is a bit gutting.

Instead you'll end up with £6800 after tax and NI was paid on it. So add £1200 and bunged 8k into the pension. Tax relief means that a full 10k goes in there.

Inform tax credits of the contribution, and this will be disregarded from annual income.

You've just put 10k into your pension for a total cost of £3900.

[Babyroobs]

[quote PotatoesDoNotTakeBaths]@Babyroobs

Please could you link me to the legislation where the two wages recorded in one assessment period flaw has been changed? I am affected by this and I was following the court case of the single mums who took UC to court and it was found unlawful. I've got mandatory reconsiderations pending.

I hate what the government have done with the 5 week wait for payments, you are in debt before you even start I'm still paying it off, and despite not being affected by the two child policy and rape clause, I'm particularly disgusted with that aspect, but sadly the public opinion seemed to be in favour of it.

There are some good things about UC though. I feel more able to take on overtime without having to contact tax credits and wait for recalculation. It will also benefit me if my DC stay until they are 21 because I won't get a non dependent deduction.[/quote]
Hope this link works !
www.legislation.gov.uk/uksi/2020/1138/pdfs/uksiem_20201138_en.pdf

[ExclamationPerfume]

@TulisaIsBrill Surely any income you receive is recorded as income by HMRC. My DH got a one off payment for not joining the company pension scheme of £3000.

We then invested what he was paid in his own pension scheme.

That year we ended up owing Tax Credits money as this £3000 came through his salary. You don't declare any more they know what your income is.

[TulisaIsBrill]

[quote ExclamationPerfume]@TulisaIsBrill Surely any income you receive is recorded as income by HMRC. My DH got a one off payment for not joining the company pension scheme of £3000.

We then invested what he was paid in his own pension scheme.

That year we ended up owing Tax Credits money as this £3000 came through his salary. You don't declare any more they know what your income is.[/quote]
Ahh....If you had informed the HMRC tax credits helpline of the gross payment you made (whatever you put in X 1.25), they would have taken this off his P60 income for the year. You have to tell them you did this explicitly.

[LemmysAceCard]

About 10 years we claimed tax credits, it wasnt much, about £100 a month, but we needed it so claimed it.

The following year, renewed the claim, nothing had changed, no pay rise, no commission, no change in hours, still same place of employment.

Tax credits decided I had an over payment even though nothing had changed, ending up paying back at £100 a month for a year.

Nobody could tell my how they made an over payment, I had correctly provided everything, they told me I was entitled to £100 a month.

Technically we can still claim a small amount but I never claimed again, it’s not worth it, they make a mistake but there is nothing you can do.

[NellWilsonsWhiteHair]

While this pension stuff is perhaps very clever (and I hope some people reading it are finding it useful!), it’s definitely not something I would have had the capacity/wherewithal to deal with at the time. I was a single parent with a not-very-sleeping child, a demanding job, a lengthy-ish commute, and too much month left at the end of the money. I think those sorts of circumstances are more common than not for TC (or indeed UC) recipients, and it feels instinctively unfair that fiddling the money a bit means you can avoid/minimise getting penalised for in-year pay rises or fluctuations in childcare costs.

I don’t regret claiming them because I literally needed them - would not have been able to keep a roof over our heads and food on the table otherwise - but I am bitter at how difficult they are. I’m also really aware I’m very fortunate that my income has climbed and climbed, rather than fluctuating, so even though repaying overpayments has pushed me into credit card debt, I’m able to pay this back now without greater hardship than I would have faced if I’d just never claimed them. Not everyone is going to be on that trajectory though.

[TulisaIsBrill]

@NellWilsonsWhiteHair

While this pension stuff is perhaps very clever (and I hope some people reading it are finding it useful!), it’s definitely not something I would have had the capacity/wherewithal to deal with at the time. I was a single parent with a not-very-sleeping child, a demanding job, a lengthy-ish commute, and too much month left at the end of the money. I think those sorts of circumstances are more common than not for TC (or indeed UC) recipients, and it feels instinctively unfair that fiddling the money a bit means you can avoid/minimise getting penalised for in-year pay rises or fluctuations in childcare costs.

I don’t regret claiming them because I literally needed them - would not have been able to keep a roof over our heads and food on the table otherwise - but I am bitter at how difficult they are. I’m also really aware I’m very fortunate that my income has climbed and climbed, rather than fluctuating, so even though repaying overpayments has pushed me into credit card debt, I’m able to pay this back now without greater hardship than I would have faced if I’d just never claimed them. Not everyone is going to be on that trajectory though.

Hmmm....Why is it unfair (to avoid the overpayment if your circs become more fortunate mid year)?

You budget according to your present circumstances. If in the middle of the year, you get a payrise it'd be fair enough if your benefits payments drop from that point on. But to punish your past self for your current fortune is nonsense.

Hence if you can mitigate that, because to me that is the objectionable part of the system, why not?

[NellWilsonsWhiteHair]

@TulisaIsBrill it feels unfair because of the level of complexity involved, I guess. I completely agree that that’s the objectionable part of the system, I just think that having a perfectly legal workaround which only those with the resources to exploit it are going to benefit from is possibly worse than having no way around it at all.

I realise this is exactly how other elements of tax administration also work (hence how companies can minimise their tax liability etc), it just feels not quite fair for that to apply to means-tested benefits. You need to know how to invest the pay rise into a pension, how much to invest, and you even need to know the right words to proactively tell HMRC that’s what you’re doing? It feels unfair that a welfare payment intended to support workers on lower incomes requires this level of cultural capital to avoid getting screwed over.

[TulisaIsBrill]

[quote NellWilsonsWhiteHair]@TulisaIsBrill it feels unfair because of the level of complexity involved, I guess. I completely agree that that’s the objectionable part of the system, I just think that having a perfectly legal workaround which only those with the resources to exploit it are going to benefit from is possibly worse than having no way around it at all.

I realise this is exactly how other elements of tax administration also work (hence how companies can minimise their tax liability etc), it just feels not quite fair for that to apply to means-tested benefits. You need to know how to invest the pay rise into a pension, how much to invest, and you even need to know the right words to proactively tell HMRC that’s what you’re doing? It feels unfair that a welfare payment intended to support workers on lower incomes requires this level of cultural capital to avoid getting screwed over.[/quote]
I'm not going to disagree one iota with the sentiment you expressed ... . It definitely requires some knowledge and active interest in how the system works to understand It, and yes, it's very, very likely that the people most screwed over by it are those who have the least - as you so eloquently put it - cultural capital to mitigate against it. They probably don’t have an excel sheet dedicated to it.

So - to break it down:

1. open a self invested pension, or ask your employer if they either do salary sacrifice/allow you to make additional contributions to the work one.
   
   
2. Take the extra money you're now earning, and put it to one side until the last month of the tax year.. Live on the rest, including the tax credits just like you were before.
   
   
3. Chuck that money into the pension before April 5th.
   
   
4. ring HMRC and tell them how much you put in as a grossed up contribution.
   
   In the next tax year, if you wish, alter your pension contributions back down. Alternatively, keep them going if your sense of ethics says it’s ok to do so, and benefit from saving for retirement in a very efficient manner. Up to you.
   
   So, to bring it back to the OPs question - yes, that's the way it works. But also - here you go - this is how you can work around it. And that applies to anyone in the situation. Do with that information what you will.
   
   In a way, all this information is on the ‘working out your tax credits worksheet’ everyone gets. It’s just not presented quite as explicitly.

[dontdisturbmenow]

Tbh, I think any savings should be exempt
Counting savings as income for UC was the best move they've made.

All those people claiming tax credits after getting large inheritance, or through divorce. Or those gained through self-employment.

Why should claimant get to keep savings whilst getting funded by tax payers whilst those paying higher taxes and not entitled are expected to use their savings?

The only error was not discarding help to buy ISAs.