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HMRC internal manual

Tax Credits Technical Manual

From
HM Revenue & Customs
Updated
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Calculation of awards: Step 3 - Determining whether income needs to be taken into account and applying income tapers

Income periods

Section 7(3), (5) and (7) Tax Credits Act 2002

The income period taken into account for awards calculations are based on the income received for a full tax year.

Awards made for all or part a year will be assessed initially on a previous year income (PY) basis. Awards will be re-assessed where the current year income (CY) is different to the PY income.

  1. If the current year income (CY) goes down in the current tax year by £2,500 or less than the previous year income (PY) the income used will be the previous year income (PY).

Tax Credits Act section 7(3)(c)

  1. If the current year income (CY) goes down in the current tax year by more than £2,500 than the previous year income (PY) the income used will be the current year income (CY) plus £2,500.

Tax Credits Act section 7(3)(d)

  1. If the current year income (CY) is the same as the previous year income (PY) the current year income will be used (CY).

Tax Credits Act section 7(3)(e)

  1. If the current year income (CY) is more than £5,000 higher than the previous year income (PY) the income used will be the current year income (CY) minus £5,000.

Tax Credits Act section 7(3)(b)

  1. If the current year income (CY) is less than £5,000 higher than the previous year income (PY) the income used will be the previous year income (PY).

Tax Credits Act section 7(3)(a)

Again where the claim has been made by a couple who were not together in either or both of the relevant tax years, the household income will be the sum of the income of each adult in the appropriate tax year.

Examples: There are currently five examples of which income period to use, these are:

Example 1: Tax Credits Act section 7(3)(c)

An initial award for the tax year 2015/16 (CY) will be based on the income of the household in the PY (2014/15 tax year or CY-1). If the household income in the CY (2015/16) is £2,500 or less than the income in PY, the award for the 2015/16 tax year will be based on the PY income.

CY income = £10,000

PY income = £12,500

Income used = PY income = £12,500

CY income is £2,500 or less than PY income therefore PY income of £10,000 is used

Example 2: Tax Credits Act section 7(3)(d)

An initial award for the tax year 2015/16 (CY) will be based on the income of the household in the PY (2014/15 tax year or CY-1). If the household income in the CY (2015/16) is more than £2,500 less than the income in PY, the award for the 2015/16 tax year will be based on CY income but the first £2,500 of the decrease will not be included.

CY income = £10,000

PY income = £15,000

Income used = CY income plus £2,500 = £10,000 + £2,500

CY income is more than £2,500 less than PY income therefore CY income plus £2,500 is used.

Example 3: Tax Credits Act section 7(3)(e)

An initial award for the tax year 2015/16 (CY) will be based on the income of the household in the PY (2014/15 tax year or CY-1). If the household income in the CY (2015/16) is the same as PY income the CY income will be used.

CY income = £10,000

PY income = £10,000

Income used = CY income = £10,000

CY income is the same as PY income therefore CY income is used.

Example 4: Tax Credits Act section 7(3)(b)

An initial award for the tax year 2015/16 (CY) will be based on the income of the household in the PY (2014/15 tax year). If the household income in the CY (2015/16) is more than £5,000 higher than the income in the PY, the award for the 2015/16 tax year will be reassessed on the income of the CY less £5,000.

CY income = £50,000

PY income = £20,000

Income used = CY income minus £5,000 = £50,000 - £5,000 = £45,000

CY income is more than £5,000 higher than PY income therefore the CY income minus £5,000 is used.

Example 5: Tax Credits Act section 7(3)(a)

An initial award for the tax year 2015/16 (CY) will be based on the income of the household in the PY (2014/15 tax year or CY-1). If the household income in the CY (2015/16) is more than PY income by not more than £5,000, the award for the 2015/16 tax year will be based on the PY income.

CY income = £24,000

PY income = £20,000

Income used = PY income = £20,000

CY income is higher than PY income but not more than £5,000 higher than PY income, therefore PY income is used.

Note: Prior to April 2006, the income increase disregard was £2,500. From April 2006, the income increase disregard was raised to £25,000. From April 2011, the income increase disregard was lowered to £10,000 and, from April 2013, this was lowered to £5,000. From April 2012, an income disregard of £2,500 for falls in income was introduced.