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Last Updated: Monday, 5 December 2005, 17:09 GMT
Big change to tax credit limits
Mothers with children
Ceasing to be responsible for a child will have to be reported
People who claim tax credits will soon be able to see their incomes rise by 25,000 before they have to tell the government of the change.

The new rule, scheduled for next year, was announced by Chancellor Gordon Brown in his pre-Budget report.

At the moment claimants should see their credits stop if their incomes rise by just 2,500.

Mr Brown said the new limit would cover 95% of all pay increases currently experienced by claimants.

The change will relieve both claimants and the Revenue & Customs of a massive administrative burden which has bedevilled the system of tax credits since it was introduced in its current form in 2003.

The Treasury said: "From April 2006, the disregard for increases in income between one tax year and the next will rise from 2,500 to 25,000, ensuring that almost all families with increasing incomes will not have their tax credit entitlement reduced in the first year of the increase."

The Revenue & Customs will also put automatic limits on the amounts which can be recovered if there has been an overpayment.

However new responsibilities are being placed on claimants.

From November 2006, claimants will have to report more changes of circumstances than they are obliged to report now.

They will be:

  • ceasing to work at least 16 or 30 hours per week
  • ceasing to be responsible for a child or young person.
  • a child or young person ceasing to qualify for support.

And from April 2007 they will have just one month to report a change that reduces their tax credit entitlement, not three months as at present.


Many claimants have complained that in the past two years they have made honest claims and been told - incorrectly - that they were entitled to tax credits.

They were then shocked to find later that they were facing demands for the repayment of the overpaid credit.

Apparently, the problems often hinged on the newly established tax credit computer system accurately recording when the Revenue & Customs had been told by a claimant their income had risen.

In October the National Audit Office reported that the government had lost nearly half a billion pounds in the 2003/04 tax year because of widespread overpayments to claimants that could not now be recovered.

And it estimated that for the first two years of the current system nearly a billion pounds would have to be written off as not recoverable.


During the 2003/04 tax year, 16bn was paid out to 5.7 million claimants.

But of that, 1.8 million claimants were overpaid by a total of 2.2 bn - through a mixture of fraud and administrative errors.

Even before the NAO report, there had been widespread criticism this year of the Revenue & Customs' policy of trying to recover overpaid money, even when the original overpayment was due to an administrative error by their staff and led to subsequent hardship for the families involved.

Last week the official website for online applications was suspended because the Revenue & Customs discovered it was being used by criminal gangs to make bogus applications.

Earlier this month the computer firm EDS agreed to pay the government 71 million in compensation for the poor performance of the tax credit computer system it designed.

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