Select Committee on Work and Pensions Written Evidence



Case Study 1—Working Tax Credit and Pension Credit circularity

  Mrs D (55) is working, Mr D (61) has no income having just lost his Incapacity Benefit. The couple receive a small amount of Working Tax Credit. They apply for, and receive, a small amount of pension credit.

  Receiving state pension credit makes them entitled to maximum Working Tax Credit. Therefore if Mr and Mrs D notify HMRC immediately of their pension credit award they will have their Working Tax Credit increased from a small amount of £8.73 per week to their maximum amount of £76.79 per week.

  This is where the problem begins for Mr and Mrs D. The subsequent increase in their Working Tax Credit is a change which they must notify to the pension service immediately. The consequence of this is that their pension credit will be re-calculated to take into account the increased Working Tax Credit, thus reducing their pension credit entitlement to nil.

  Because Mr and Mrs D are no longer entitled to any pension credit, they are no longer passported to maximum Working Tax Credit. Therefore in order to avoid an overpayment of Working Tax Credit they would need to inform HMRC of this. This will mean that their WTC will be recalculated to a much lower amount.

  At this point Mr and Mrs D would most likely re-qualify for pension credit. So Mr and Mrs D are back to the same position they were in at the start. They can now apply for pension credit, which will then passport them back to maximum Working Tax Credit... and so the circularity continues.

Case Study 2—Pension Credit and Tax

  Mrs W applied for pension credit when she turned 60. Her only income was her State Retirement Pension (approx £110 per week). Her pension credit was calculated at £4.05 per week.

  Mrs W felt it was unfair that the tax she would be due to pay on her SRP was not taken into account. Upon investigation she found that in fact her pension credit had been incorrectly calculated and she contacted the Pension Service numerous times to request that it be recalculated. The answer was consistently that tax was nothing to do with the DWP and was a HMRC issue.

  Mrs W then contacted her MP for assistance. A letter was sent to HM Treasury asking for clarification of the pension credit regulations. The Treasury confirmed that pension credit should be calculated net of any tax paid, and advised Mrs W to contact the Pension Service again. She did this, enclosing the letter from the Treasury, only to be told again that this was not a Pension Service issue and to contact HMRC.

  After going back to her MP, the case has now been resolved and Mrs W's pension credit has been calculated correctly.

  On this particular issue there is at present no mechanism for communication between DWP and HMRC. Nor is there any guidance for pensioners that they should be sending the Pension Service tax estimates obtained from HMRC in order to receive their correct entitlement.

10 April 2007

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