Select Committee on Treasury Written Evidence



  The following, provided by the Low Incomes Tax Reform Group, gives an example of where an overpayment may inevitably arise even when a claimant reports any change of circumstance on time:

    "Fergus and Deirdre made a joint claim for tax credits in 2003-04. In the first six months of the year, only Fergus was working. Their joint income for 2001-02 was £12,000 a year, Fergus's annual salary. Therefore, for the first six months of 2003-04 their tax credit award was based on joint income of £6,000 (half of Fergus's earnings).

    Fergus continued on the same salary level in 2003-04. Half way through the tax year Deirdre started working, also earning £12,000 a year, so their annual income in a full tax year doubled to £24,000 and their joint income for the second half of the year to £12,000. Fergus and Deirdre reported this change to the Revenue straight away, and the Revenue processed it promptly. The Revenue recomputed their income ignoring the first £2,500 of the increase, and recalculated their income accordingly.

    Now because of the way the regulations spread income over the whole tax year, when Fergus and Deirdre's income for the whole of 2003-04 is recalculated, it is spread evenly over both six-month periods. Thus, because their annual income is now £18,000 (£12,000 for Fergus and £6,000 for Deirdre), for the first six months their income is recomputed as £9,000, not £6,000. Even with the £2,500 disregard, this is bound to make a difference to their entitlement for those six months and could mean that an overpayment will have arisen in that period.

October 2005

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