Changes affecting working parents over the next few months: tax credits, wages and childcare costs
Tax credit overpayments
Childcare vouchers and maternity leave
Tax-free childcare and employer supported childcare
Housing Benefit for families
Expansion of Universal Credit
National Living Wage
Some changes to tax credits this year make it easier to build up an overpayment and increase the rate at which recovery happens. If a claimant’s income goes up by more than £2,500 in 2016/17 (compared to 2015/16), then it is 2016/17 income, minus the first £2,500, that has to be used when finalising their tax credits for 16/17. That means if a claimant whose income has risen hasn’t given HMRC an estimate of 16/17 income, or has given them an estimate which turns out to be too low, they could easily be overpaid during this tax year.
The previous ‘disregard’ of an increase in income between one tax year and the next was £5,000, and the latest change brings it back down to its original level (it was increased because of the level of overpayments!) You can see how people who have been away from the workplace, particularly on maternity leave, could very easily have an increase of more than £2,500 in the tax year they return to work. Where income goes up by more than this amount, claimants should let HMRC know immediately.
If someone is overpaid, HMRC will now recover the overpayment by cutting their ongoing award by 50% if it is based on an income of £20,000 or more. HMRC will use whatever income they are currently using for the award – another reason to keep them up to date. The other repayment rates are 10% (if the claimant has a maximum award), 100% (family element only), and 25% for everyone else.
Remember that those rates are the maximum – HMRC can recover more slowly, and one option is to ask them to do so, providing evidence of income and expenditure. It’s good practice to check whether the claimant has actually been overpaid, and whether there’s scope to ask HMRC not to recover because the claimant kept them fully informed (Advice Now’s factsheet is helpful on this).
A recent Employment Appeal Tribunal (EAT) has given some clarity on a tricky area – childcare vouchers during maternity leave. The rules on maternity leave state that while a woman on maternity leave is entitled to any non-cash benefit under her contract, she is not entitled to ‘remuneration’. Before this judgment, it was unclear what happened to childcare vouchers when a woman went on maternity leave. HMRC guidance suggested they should be paid in full throughout, but this was only guidance and had no statutory force, making it hard to advise where an employer refused to pay them.
In the case of Peninsula Business Services Ltd v Donaldson, the Employment Appeals Tribunal held that vouchers are remuneration. Ms Donaldson had brought a claim against her employer, Peninsula, for maternity discrimination. Her contract included a clause that said if she took part in the childcare voucher scheme she would suspend her participation during maternity leave. Peninsula pay only Statutory Maternity Pay to employees on maternity leave, so there would be no salary that could be sacrificed. At Employment Tribunal (ET), the tribunal decided the vouchers were not remuneration and so should continue, but the employer appealed.
The EAT looked behind the HMRC guidance at the regulations. They found that the phrase ‘salary sacrifice’ was misleading, in fact what was happening was that part of the employee’s salary was diverted to buy the vouchers. As such they found it to be remuneration, and that it was not unlawful to suspend the scheme during maternity leave.
Most clients who get childcare vouchers will be in a salary sacrifice scheme, and many will be getting SMP only, but for those who aren’t it’s worth noting:
- The EAT noted that some employers offer childcare bonuses on top of salary. Where they are offered as a perk rather than part of a sacrifice scheme they will be a non-cash benefit and must continue.
- There was no discussion of what happens to an employee who gets occupational maternity pay (where the employer chooses to pay more than statutory). Any payment over Statutory Maternity Pay can be reduced to offset vouchers. There is no advantage to the employer in refusing to do so and it is possible that such refusal could be discriminatory.
There is no obligation on an employer to provide a voucher scheme, and in early 2017 the government will introduce tax-free childcare, a scheme where the government contributes 20% of overall childcare costs up to certain limits, without employers getting involved (see below).
The budget confirmed that tax-free childcare will start in early 2017 and that it will be phased in, with the parents of the youngest children eligible first. Parents of disabled children will also be prioritised, which is excellent news (we expect this to be children on Disability Living Allowance). By the end of 2017, all eligible parents will have access to the scheme.
You might remember that parents won’t be able to take advantage of tax-free childcare if they are in a childcare voucher scheme or claim tax credits or Universal Credit. The budget stated that the childcare voucher scheme will continue for new entrants until April 2018. Once in a voucher scheme, it continues as long as the employer provides it. Parents who are deciding what to do during the transition to tax-free childcare should make sure they check what notice period would be needed if they wanted to leave a childcare voucher scheme.
From 1 May 2016, Housing Benefit will be calculated differently for new claimants with children. It won’t include the ‘family premium’, meaning that parents will either get no Housing Benefit, or less than they would have done before, because of their income. This won’t apply to claimants who get Housing Benefit with Income Support, income-related Employment and Support Allowance, income-based Jobseeker’s Allowance or the Guarantee Credit of Pension Credit. No income-based calculation is needed there. They will get the maximum Housing Benefit which applies in their circumstances.
Existing claimants keep the family premium. Some new claimants will, of course, have to claim Universal Credit (UC) instead of Housing Benefit, but at the moment people with children who are in work can only claim UC in a few areas.
Over the next few months, Universal Credit will be expanding rapidly. In some areas, no one with children can claim. In others, people with children can claim but there are limitations (for example, people with children on DLA cannot claim). In ‘full service’ (also known as ‘digital service’) areas, everyone can claim. Universal Credit only applies if a claimant makes a new claim for one of the benefits it replaces (called ‘legacy benefits’). Claimants should be told if they have to claim Universal Credit instead of a legacy benefit. Once they claim Universal Credit, all their legacy benefits stop. Because Universal Credit may have waiting days before entitlement starts, and is only paid at the end of each monthly assessment period, it can be up to six weeks before a first payment. Claimants can ask for a short-term advance payment of benefit which will be deducted from subsequent UC payments.
We now know that the benefit cap won’t be reduced in April as originally planned, but will instead change from autumn 2016, subject to Parliamentary approval. The new figures will be:
- £442.31 a week if you are a couple or have children and live in London
- £384.62 a week if you are a couple or have children and live outside London
- £296.35 a week if you are a single person and live in London
- £257.69 a week if you are a single person and live outside London.
The exemptions will be the same as the current ones, so, for example, families on Working Tax Credit won’t be affected. In addition, the government have also announced an exemption of people receiving Carer’s Allowance – whether it is the claimant or their partner. That exemption will apply when the cap is reduced.
The capped figures apply to all benefits received, with some exceptions including Disability Living Allowance, Attendance Allowance and Personal Independence Payment.
The national living wage (NLW) will be the enforceable minimum wage from April 2016, at £7.20 per hour if you are 25 or over. There’s more information on the official site.
Because many benefits are based on income, there will be some effect. For example, Housing Benefit takes into account net earnings, whilst tax credits take into account gross taxable income. The way benefits are calculated mostly isn’t changing in April, except for Universal Credit, where more of your earnings will be taken into account. That means that some of the increase in wages will be lost because of benefit reduction.
You should always make sure that clients report changes in income to all the agencies that pay them benefit – for example, HMRC, local authority, and Jobcentre Plus. Because tax credits use the previous tax year’s income, there won’t be an immediate effect, but clients should still let HMRC know if they expect to have over £2,500 more in income than in 2015/16. For couples, that means joint income, but even two people working full-time won’t go over £2,500 on the minimum wage rise alone. All the same, don’t assume that HMRC know a client’s wage has increased – it is still up to claimants to let them know.
These changes will affect Scotland differently.