Tax Credit overpayment problems predicted as the disregard drops back to 2005 level.

Tax Credit overpayment problems predicted as the disregard drops back to 2005 level.

*Please note the information in this article may be out of date

Almost 6 million Annual Declaration packs have been sent out by HMRC, requiring people to double check that they are receiving accurate tax credits. The deadline for the return of the tax credit renewal pack is the 31st of July, but HMRC are encouraging people to complete their renewals online. Once you receive your renewal pack you can complete the online renewal process. HMRC are asking people to double check that the information in the pack is correct. Any changes, even small ones, to working hours, pay rates, childcare costs, etc can effect your tax credits.

Tax Credit over payments are likely to become a problem again as there has been another drop in the Tax Credit Disregard from £5,000 to £2,500. This sees the disregard return to it's original 2005 rate. 

The disregard is one of the most confusing parts of the Tax Credit System. As the System pays credits based on the present tax year's income, rather than the previous years, entitlement can only be established at the end of the tax year. Revenue assess ones income at the end of the tax year, and if any increase is within £2,500 of what it was the previous year, then there are no changes to your Tax Credits. So, the first £2,500 of any income increase is disregarded when calculating your Tax Credits .

The last few years have seen a significant drop in the disregard from £25,000 to £10,000; then a further drop to last years £5,000. Now the disregard has dropped to £2,500.  After April 2016, an income increase of over £2,500, will be enough to cause a change in entitlements. This change is quite likely to re-ignite the messy issue of Tax Credit over payments.

The reason there was such a jump in the Tax Credit Disregard back in 2005 was the fact that the £2,500 figure had proven to be too small of a buffer for families in receipt of Tax Credits. Many were caught up in over payment situations, finding themselves having to pay back Tax Credits. Therefore in 2006-07, in a bid to reduce the volume of over payments arising from increases in income, the disregard was increased quite dramatically to £25,000. 

Those in receipt of Tax Credits need to be vigilant in promptly reporting any changes in their circumstances regarding working hours, childcare costs, living arrangements or income, to HMRC, to avoid over or indeed under payments of Tax Credits.  

Renewal packs have all been sent out by now (June 2016). If you have not received one contact HMRC on the tax credit helpline - 0345 300 3900. Once in receipt of your renewal pack you can complete your renewal online. The cut off date for renewing your Tax Credits is the 31st July. 

More on the Tax Credit Disregard.