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HMRC internal manual

Claimant Compliance Manual

From
HM Revenue & Customs
Updated
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Overview: The Income Disregard

Customers awards are initially based on their previous year’s income. They have to report their current year income in response to the S17 notice, and their awards are then finalised.

When Working Tax Credit and Child Tax Credit were first introduced in 2003/04 the first £2,500 of any difference between their previous year and their current year’s income was disregarded when calculating their final award.

Notes:

  • From 2006/07 the income increase disregard increased to £25,000.
  • From 6 April 2011 the income increase disregard decreased to £10,000
  • From 6 April 2013 the income increase disregard will decrease to £5,000
  • From 6 April 2016 the income increase disregard will decrease to £2,500

Note:

From 6 April 2012, an income disregard of £2,500 for falls in income will be introduced. This will mean that any reduction in income in a year of less than £2,500 will have no impact on a tax credit award.

Example 1

Brian is employed as a labourer in the building industry. When he claimed tax credits in 2004/05 he told us that his income in 2003/04 was £10,200. When he returned his S17 notice he told us that his income in 2004/05 was £13,500. The difference of £3,300 between his 2004/05 income and his 2003/04 income is more than the £2,500 disregard. The income to be taken into account for 2004/05 was therefore £11,000 (£10,200 + (£3,300 - £2,500)). His tax credit award for 2005/06 was initially based on £13,500.

Example 2

Sian is employed as a nursery nurse. Her tax credit award for 2006/07 is based on her earnings of £15,640 in 2005/06. In August 2006 she is promoted and gets an extra £500 a month. She contacts us to tell us her income has increased, and she estimates her annual income for 2006/07 will be £19,640. The difference of £4,000 between her 2006/07 income and her 2005/06 income is less than the £25,000 disregard so her current award is not affected, but the information is recorded and her run-on payments from April 2007 will be based on income of £19,640.

Example 3

Carl works 16 hours a week part-time as a self-employed IT analyst and is in the final year of his degree course at college. His partner stays at home to look after their 12 month old baby. His tax credit award for 2006/07 is based on his income of £8,900 in 2005/06. He passes his final exams in June 2006 and works 40 hours a week building up his IT business. He tells us about his increase in hours and estimates his income for 2006/07 will be £35,000. The difference of £26,100 between his 2006/07 income and his 2005/06 income is more than the £25,000 disregard. His 2006/07 award is amended to reflect that he is now entitled to the 30 hour element and is based on income of £10,000 (£8,900+ (£26,100 - £25,000)). His run-on payments from April 2007 will be based on income of £35,000.

Example 4

Joe is self-employed, disabled and works 25 hours per week. His tax credit award for 2012/13 is based on his income of £10,000 for 2011/12. Due to lack of work available he informs us that his income has decreased and estimates his income for 2012/13 will be £8,000. As the income decrease in CY is less than the £2,500 income decrease disregard his award will not change.