Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2016 — House of Lords, 2016-03-07
Topic: Macroeconomics
Terence O'Neill (Conservative, Centre-right): My Lords, I confirm that the provisions contained in the regulations before your Lordships today are compatible with the European Convention on Human Rights I will start by setting out the purpose of the regulations that are put before the House today. These regulations make a single change: reducing the income rise disregard from £5,000 to £2,500, taking it back to the original level it was set at when tax credits were introduced and aligning it with the income fall disregard. This change was announced in the summer Budget of 8 July 2015. This means that awards will more accurately reflect the claimant’s recent earnings, meaning fewer overpayments and that fewer people will go into debt as a result Tax credits were introduced in 2003, at which point the income rise disregard was set at £2,500. At the time, the tax credits IT system was unable to cope with the unpredictability of family incomes, and in 2006 the amount by which a family’s income could increase before their tax credit award would adjust within the year—the income rise disregard—was increased to £25,000. This meant that two families with significantly different incomes could receive the same tax credits award Following the 2010 election, the coalition Government reduced the rate of the disregard to £10,000 and then to £5,000. Improvements to stabilise the tax credits system and the increased use of real-time information—RTI—mean that the system is now able to be more responsive to claimants’ changes of circumstances. I reassure noble Lords that when considering bringing forward this change, the Government considered the impacts on claimants in accordance with their legal obligations, and that there will be no cash losers from this measure in the tax year The purpose of a disregard is to provide a buffer zone in which a family’s income can increase during the course of a year without affecting their tax credit entitlement. It has been a feature of the tax credits system since its inception in 2003 and was originally set, as I said, at £2,500. Let me explain how the disregard works in practice. Following receipt of a claim, HMRC makes an initial tax credit award based on the claimant’s current circumstances and income from the previous tax year. As the current tax year progresses, claimants can notify HMRC of changes in their circumstances. Some changes must be reported within one month: for example, a partner moving in with a previously single claimant. However, other changes, such as a change in income, do not need to be reported until the year’s end, although claimants are encouraged to keep HMRC informed of changes in earnings After the end of the tax year, HMRC sends claimants renewal papers. The purpose of these is to determine the claimant’s actual entitlements for the year just ended and, if appropriate, to initiate a claim for the year ahead. HMRC does this by asking the claimant to confirm their income and circumstances for the year that has just ended. Where the claimant’s income has stayed the same, or if the income in that year has risen by less than the disregard amount compared to the year before, the increase in income does not affect the tax credit award in that tax year. It is disregarded from the final calculation of a tax credit award. If, on the other hand, their income has risen by more than the tax credit disregard, their tax credit award is decreased in the year. However, it is important to emphasise again that individuals will still be taking home more money, owing to the increase in their income Either way, in the subsequent year a claimant’s tax credits award will be calculated in the usual way, using their full annual income from the previous tax year to determine their tax credit entitlement. After the change in the tax year, whether the recipient’s pay rise was above or below the disregard level, their tax credit award for the following year will be adjusted downwards to what it would have been had no disregard existed I turn to fairness. In practice, this means that when the income rise disregard was set at £25,000, someone on tax credits could get a pay rise of £2,000 per month and still be technically entitled to the same tax credits award until the tax year end. Even under the current system, a household’s income can rise by £400 a month and they will still be entitled to the same tax credits award until the end of the tax year. Claimants would see their tax credits entitlement reduced in the following year, having become accustomed to the significant income change Let us assume that this pay rise of £400 a month means that this household is now taking home as much money as their next-door neighbours, whose circumstances are exactly the same. But the next-door neighbours are not entitled to the same level of tax credits even though they have exactly the same income and circumstances. Under the system set out in the regulations, with an income rise disregard of £2,500, the household with an increased income of £4,800 a year would have their tax credits award adjusted to reflect their increased earnings sooner. Their total income would rise more than the decrease in the tax credits award, providing the buffer zone that the income rise disregard is designed for, and they would also see their award aligned more closely with next year’s tax entitlement—the same as the next-door neighbours This example shows how reducing the income rise disregard reduces the unfairness in tax credits awards for families in similar circumstances. This is the right thing to do to ensure fairness to all tax credits claimants. This principle is already live in universal credit, where a claimant’s award changes each month based on their earnings, and this change brings forward some of these benefits HMRC will communicate this change by providing information in tax credits renewals packs, which will highlight the annual income threshold that would need to be exceeded to trigger a change in their tax credit awards, and when they should report changes in income to HMRC With the introduction of RTI—as I said, real-time information—employers can now submit employee payroll information in real time. Ninety-nine per cent of employers are covered by the scheme, which means that HMRC is now in a better position proactively to check that it has the correct income details when claimants renew their award at the end of the tax year. It also provides an opportunity to check awards within the year From September 2016, HMRC will use this real-time information to conduct automated checks of an individual claimant’s monthly income. This means that HMRC is better able to assess claimants’ tax credit entitlement in relation to their increased income. Should RTI find that a claimant’s entitlement should be reduced by £500 or more, HMRC will send a letter, text message or automated voice message to the claimant, prompting them to make contact with HMRC within 14 days. If they do not, their income will be automatically amended on the system Let me be clear: HMRC will not only tell all claimants up front when they must report changes in their income, it will also, in the majority of cases, prompt claimants to report significant increases in income that HMRC has picked up through the RTI feed. If claimants do not respond to the prompt, the system will automatically make the change and reduce the claimant’s tax credits award. This reduces the risk of overpayments while making clear to the claimant their responsibilities Finally, the Government are committed to seeing this change implemented correctly, and are taking this considered approach in both the operational IT delivery and in engagement with claimants. This will ensure that we see a reduction in the risk of tax credit overpayments and, therefore, a reduction in claimants falling into debt In conclusion, the disregard reduction will affect only those claimants whose income increases in-year by more than £2,500. Let me repeat that there will be no cash losers. This change will make tax credits more responsive to income changes; will reduce the overinflated rise and subsequent fall that follows an income rise; and will reduce the inequality of very different awards to families in similar circumstances and with similar incomes. It returns the disregard to its original design and purpose, and now is the right time to do this because the tax credits system is now much more able to deal with income changes. I beg to move.