Transitional element when TC award based on last years income.

Sorry, me again

I’m just wondering what will happen on migration day if the TC claimant is receiving the wrong amount of TC’s because they have not informed HMRC of an increase to last years income.
Will the DWP wait for a finalised award so they have a figure of what the award should have been rather than what it was?

The legislation requires them to base the transitional element calculation on the tax credit “award” as on migration day, and not the entitlement as later finalised.

As such, whichever income figure is being used by HMRC on migration day, whether that is last year’s income or a new estimate for the current year, is the legally correct figure.

Remember, the same income figure is used for the indicative UC amount as well.

Interesting.
So, does the claimant benefit from the fact that they are receiving too much TC’s?
This particular client seems to be getting ( I haven’t seen the award notice) about £200 per week based on SE income of £8,000 last year. This year his SE income is about £17,000 so his TC award should be less.

It’s worth understanding the effect of different income levels.

The transitional element is calculated based on the difference between UC entitlement and TC entitlement on equivalent earnings. So, when thinking about the effect of an increase or decrease in income, we have to look at the difference between the taper rates of the two benefits.

There are then 3 different cases to consider:
1. A change in income which is within £2.5k of the previous year.
Such a change is ignored for TC, and means the taper rate for TC is 0%, whereas for UC it’ll be either 55% (if within the income tax personal allowance), or 37.4% (if employed income outside the personal allowance), or 39.05% (if self-employed income outside the personal allowance).
This means that as income increases, UC reduces whereas TC doesn’t, meaning a higher income is beneficial for the transitional element.
2. A change in income which is outside £2.5k of the previous year, but is within the income tax personal allowance.
For TC, the taper rate is 41%, whereas for UC it is 55%.
This means that as income increases, UC still reduces by more than TC reduces, which means that again higher income is beneficial for the transitional element.
3. A change in income which is outside £2.5k of the previous year, and is above the income tax personal allowance.
For TC, the taper rate is 41%, whereas for UC it is either 37.4% or 39.05%.
This means that as income increases, TC reduces by more than UC reduces, and means that a lower income is more beneficial for the transitional element.

I’ve ignored here the effect of Class 2 NICs, as DWP do not seem to take it into account (going by documents released under FOI requests).

Coming now to your case, assuming he’ll be entitled to a transitional element, then (based on the above), income of around £12.5k would be most beneficial.
If you want to compare £8k to £17k, then the increase in estimated income would reduce the total legacy amount by about £222, and the indicative UC amount by about £353, so any transitional element would go up by about £131 if he was to inform HMRC of his estimated income for this year.

amazing explanation charles

That’s really helpful, thank you Charles.
So, as a general rule, most migrating TC claimant’s would benefit from informing HMRC that their income is higher than last years unless their income is a fair amount over the income tax personal allowance?
Do we have a rough earnings figure where the balance switches to better off sticking to lower earnings figure?

thanks for that summary charles…..want to make sure I have understood it though!

currently have a lone parent on tax credits. 1 disabled child element. earnings below income tax personal allowance.

they will actually earn about £1k more over the tax year than the estimate used to make the provisional award. normally no change to in year award with that.

am I best to get them to report the fact they estimate they will earn more and then claim uc (they have a migration notice saying to claim by the end of january) as that way the tax credit amount stays the same but the indicative uc amount would be reduced by the extra?

Correct. They should give as high an estimate as is reasonable!

I have another change in tc award linked query and just wanting some opinions…

client is single and owns home. disabled worker who has been doing 30 hours at NMW. has a migration notice to move to uc by mid march.

issue is that as of the start of feb they will drop to 16 hours.

my thinking is they are best to claim uc before the drop to 16 as:

1. tax credits will drop by 30 hour element
2. when the DWP pull their income from HMRC it will be higher due to them having been doing 30 hours for most of the tax year….or have I got that bit wrong and they will use the new lower earnings figure between now and the end of the tax year?