Tax credits and managed migration

Introduction

Around 1.5 million households are still receiving tax credits. Within the next two years, the government intends to move them all off tax credits. It has announced that the national roll-out of managed migration to UC will start with claimants who only receive tax credits being notified by the end of the current tax year 2023/24, with the remainder (ie, those who also receive other legacy benefits) during 2024/25.1

Understanding this process will be vital to ensure claimants do not miss out; in test areas, 20 per cent of tax credit-only claimants had their legacy benefits terminated without moving to UC.2 The timing of UC claims, maximising tax credits entitlement and estimating employment income will have a significant impact on transitional protection to prevent or mitigate being worse off on UC at the point of change.

Timing of UC claims

The managed migration process gives claimants a window of at least three months in which to claim UC, which may be extended with good reason. This gives the claimant some control over when ‘migration day’ is, which is defined as the day before UC entitlement begins – ie, usually the day before the UC claim is made.3 HM Revenue and Customs (HMRC) does not undertake a new or revised tax credits calculation as a result of the UC claim, and transitional protection is based on a snapshot of circumstances on the information it holds on migration day (see also Managed migration – transitional protection).4

The daily rate of the tax credits award in payment on migration day is converted to a monthly figure to calculate the ‘total legacy amount’. It is also by reference to circumstances and employment income on migration day that the ‘indicative UC amount’ is based, to provide an estimate of how much the claimant would be entitled to. The greater the difference by which the total legacy amount exceeds the indicative UC amount, the higher the transitional element.

HMRC will be automatically notified when a tax credit claimant receives a migration notice, and some awards will be selected for ‘pre-migration checks’ to ensure the award is as accurate as possible, with some claimants being asked to arrange a telephone interview to confirm their details. It will be in all claimants’ interests to get independent advice to check that they are not missing out on any tax credits elements, have updated changes of circumstances, and to consider the impact of anticipated changes within the three-month period. For example, a person receiving child tax credit only, who expects to move into work within three months, may be best advised to wait until they have started to receive working tax credit (WTC) before claiming UC. Timing the UC claim just after receiving a payment of tax credits may also help claimants manage the one-month and seven-day wait for the first UC payment. As soon as the UC claim is made, tax credits will be terminated (with no run-on), and the process of in-year finalisation will begin.

Income

The government pledged that under managed migration, no one would be worse off at the point of transfer, if circumstances were unchanged.5 The difficulty with tax credits is that the award in payment during the year is an estimate of actual entitlement, which is only finalised when a decision is made at the end of the tax year (or part tax year after claiming UC). This makes underpayments and overpayments an inevitable feature of the tax credits system. The starting point for a tax credits award is that it is based on income in the previous tax year, but this may be changed, based on an estimate of current year income, after applying the £2,500 disregard compared to the previous year. A current year estimate may be provided by the claimant or based on real-time information on earnings from employers. Whatever annual employment or trading income figure was used in the calculation of the tax credits award on migration day is used to calculate the ‘indicative UC amount’ with a deduction for estimated tax/national insurance (NI) and dividing by 12 to provide a monthly earnings figure.

Generally, starting with a higher income estimate will produce a higher transitional element, because the disregard, thresholds and 41 per cent taper used for tax credits can be more generous than the deductions for tax/NI, work allowance (if applicable) and the 55 per cent taper used for UC. But an individual calculation will always be required. When it comes to the UC payment at the end of the first assessment period, the transitional element is included in maximum UC, which is then reduced by the actual earnings received in the first assessment period.

Underpayments and overpayments

Once the UC claim has been made, the tax credits award will be finalised, using a truncated version of the annual review process. If the award in payment on migration day was based on an estimate of income which was higher than the relevant income used in the final decision, this will generate an underpayment, which should be paid to the claimant as a lump sum. If the award in payment on migration day was based on a lower income estimate, this will have caused an overpayment, which will be recovered.6

In either case, this will not usually lead to a revision of the UC decision and recalculation of the transitional element. There is a power for the decision calculating the transitional element to be revised, on specific grounds that the information held on migration day was inaccurate or incomplete due to claimant misrepresentation or failure to report a change, or official error.7 This would not usually cover income, as there is no requirement to report changes in income during the year, and providing a reasonable estimate or using previous year income would not generally be seen as misrepresentation or an official error as it is a basic feature of the tax credits system.8

There is also a power to revise the UC transitional element if a decision is made on or after the migration day on an application made before migration day to revise or supersede the legacy benefit, or an appeal.9 This could cover, for example, the award of a disability benefit which causes tax credits to be revised to include a disability element, which would then impact on the calculation of the transitional element. To be sure to come under this provision, it is advisable to notify HMRC that there is a pending disability benefit decision – ie, to lodge an application for a revision of the tax credits award before migration day.

Conditionality

Tax credits claimants may have been working the minimum hours required and receiving payments for several years, without any sign of a stick to compel them to increase hours or pay. Instead, tax credits prefer the carrot of an additional 30-hour element being payable.

Moving onto UC will lead to some WTC claimants being faced with conditionality and the threat of sanctions for the first time. Disabled workers and lone parents employed for 16 hours a week, and couples with children on 24 hours a week, who move onto UC will meet the administrative earnings threshold (AET), which is currently set at 15 hours a week at the minimum wage for a single person, or 24 hours a week for a couple, and subject to ‘light touch’ conditionality only. However, as announced in the Budget, the AET is due to rise to 18 hours a week at the minimum wage per person, and the couple rate is to be scrapped. When this happens, people employed for 16 hours a week may find that they must comply with all work-related requirements in UC. Self-employed people may also be caught by conditionality if earnings work out below the AET – there is protection for the first year on UC from the minimum income floor, but no protection from conditionality. Parents, carers and people with disabilities should ensure that their expected hours, as agreed in their claimant commitment for UC, reflect their circumstances.

Loose ends

Closing down the tax credits system will leave some claimants who won’t be entitled to UC. It is expected that claimants with nil awards of tax credits (not entitled to a payment for at least 13 months) will not be subject to managed migration, but new legislation will be required to terminate their tax credits awards without consent. There are some claimants entitled to tax credits under European Union co-ordination legislation, who would not meet the residence and presence conditions for UC, and according to current guidance will be ‘permanently excluded’ from managed migration.10 People within six months of pension age are not currently part of managed migration, and single claimants or both members of a couple over pension age will not be eligible for UC. It is expected that they will be invited to claim pension credit, with some new form of transitional protection to ensure they are not worse off.