Direct Payment of Working Tax Credit
Direct Payment of Working Tax Credit
The government has decided that payment of Working Tax Credit via employers will be phased out by April 2006, and replaced by direct payment into bank accounts by HM Revenue and Customs (HMRC). Workers will not lose money as a result of this change in payment method, but workers who fail to let HMRC have their up-to-date account details, or who receive overpayments from their employers may face difficulties. This note is designed to brief union representatives about these changes.
Background
Working Tax Credit (WTC) was introduced in 2003; together with the Child Tax Credit (CTC) it replaced the other tax credits that had existed up to that point. WTC and CTC are designed to make work pay and relieve child poverty, and the TUC welcomed them as important benefits for low paid workers.
This briefing deals with changes to the way in which Working Tax Credit is paid. At present WTC (except the childcare element which provides help with childcare costs) is paid to employed workers by their employers through the payroll. The employers must show the tax credit workers have been paid as a separate item on their payslip. They then claim the WTC back by deducting it from the income tax and National Insurance Contributions they are due to pay to HMRC.
HMRC already pays CTC and the child care element of WTC directly to workers. They do the same for the whole of WTC for self-employed workers.
From April 2006 claimants will receive all payments of both tax credits directly from HMRC.
What is going to change?
Businesses have complained ever since payment via employers of tax credits was first introduced. There are some costs, and small employers have been particularly likely to denounce their duties as irksome. But payment via employers, especially showing WTC on workers' payslips, has been a success in reinforcing the message that work pays. The government feels that the benefits to business now justify moving to direct payment of WTC by HMRC. This change will affect around 580,000 low paid workers currently being paid WTC via their employer.
This change will be phased in between 7 November 2005 and 31 March 2006.
From 7 November HMRC will not tell employers to start or re-start paying WTC, and will not tell them to change what they pay. From that date:
- New claimants will get their WTC paid direct into their accounts.
- Existing claimants will continue to get their WTC through the payroll until they notify HMRC of a change in their circumstances that affects the amount of their WTC award. At that point HMRC will send the employer a stop notice for that worker and will switch the worker to direct payment.
The rest of the stock of existing claimants (that is, workers who do not report a change of circumstances during November) will be switched to direct payment between 1 December and 18 February. The notices telling employers to stop paying WTC will go out in batches between these dates. These notices give employers the standard 42 days to stop WTC payments, and HMRC therefore expect all WTC claimants to be switched to direct payment by 31 March.
HMRC will normally pay WTC every 4 weeks, but claimants can ask for it to be paid weekly instead.
Publicity arrangements
HMRC is informing employers about these changes through their Employer's Bulletin and a targeted letter, which will be sent to employers in September. Employers will also be required to write to employees who get WTC before 7 November and the HMRC mailshot will include some text that employers must use.
The summer edition of Tax Credits Update, which is sent to all claimants, included an article on 'Important news if you receive Working Tax Credit payments through your employer'. There will be a direct mail shot from HMRC to claimants in November.
Before direct payment begins claimants will be sent a new award notice, telling them how much WTC they are to be paid, and at what intervals.
Issues
Changes to wage slips
The TUC expects that most claimants will not have any problems. The amount of WTC they receive will not change as a result of the change in payment method, but claimants need to be aware that:
the amount of WTC shown on their bank statements may not be the same as that which appeared on their payslips, for example, if they were paid by the calendar month by their employer but are paid every four weeks by HMRC;
the switch to direct payment will in many cases have been triggered by a change in their circumstances, which in itself caused the amount of their tax credit award to go up or down.
There should be no problems paying the tax credit into what will often be the same account their wages and WTC are currently paid into. However, these workers will notice a change to their wage slips which will no longer show WTC - and union representatives should bear in mind the possibility that some members may ask them about this, especially if they have forgotten the information they received from HMRC and their employers.
Switching from payment in arrears
Where workers are paid in arrears (or part in arrears) their WTC will have been paid in arrears when paid via the employer. In some cases there will be an overlap between the end of payment via the employer and the start of direct payment, and workers could receive their first direct payment before their last payment through the pay packet. Workers should not make the mistake of concluding that they have a new higher rate of WTC, the main consequence for them is that, when they eventually cease to receive WTC, their last payment will be received somewhat earlier than it would have been if they had continued to be paid through their salary.
Overpayments
HMRC will do their best to ensure that all employers have made their last tax credit payment by 31 March 2006. But some employers may forget or otherwise fail to stop paying WTC on the correct date. HMRC have indicated that, where an employer pays tax credit after March 2006, they will reimburse the employer, and seek to recover this money from claimants as an overpayment.
Claimants who disagree with such a decision should contact the Tax Credit Office or the Helpline as soon as possible after receiving the decision (details at the end of this briefing note). The normal rule is that appeals against tax credit decisions must be made within 30 days of the notification of the relevant decision. There is a special HMRC leaflet about appeals, How to appeal against a tax credit decision or award (WTC/AP), which is available on the web: http://www.hmrc.gov.uk/leaflets/wtc_ap.htm
Payment direct into claimants' accounts
Most claimants will have provided details of their bank, building society or Post Office card account when they applied for WTC. The mail shot that HMRC will send claimants in November 2005 will also include a contact number for registering details of a new account.
HMRC expects to pay WTC to most claimants direct into an account. They accept, however, that there are exceptional cases (such as people with no fixed address) where it is impossible to open an account. In these cases the Tax Credit Office or Helpline should be contacted as quickly as possible.
Workers should be careful to contact HMRC if they did not provide details of their account when they first applied for WTC, or if they have since changed their account. If they do not do so they may find that they cease to receive WTC when payment via the employer ends.
Help and advice
Your union is the first place you should turn to for advice and support with problems at work. The union representative in your workplace may be able to help you deal with tax credit problems her/himself. If not, s/he will know someone else in the union who can.
HM Revenue and Customs is an important source of information and advice. The HMRC tax credit Helpline is open from 8 am to 8 pm, seven days a week (except Christmas Day, Boxing Day, New Year's Day and Easter Sunday) . The telephone number is 0845 300 3900, and the number for textphone users is 0845 300 3909.
The address for the Tax Credit Office is Tax Credit Office, HMRC, Cop Lane, Preston PR1 0SB.
If there is an Unemployed Workers' Centre or Citizens' Advice Bureau in your town they may be able to advise you. Some UWCs and CABs will help by representing you in dealings with the HMRC, including appeals. There is a directory of Unemployed Workers' Centres on the TUC website, at http://www.tuc.org.uk/the_tuc/tuc-8444-f0.cfm and the National Association of Citizens' Advice Bureaux website's 'Get Advice' page has a 'find a CAB' form, at http://www.citizensadvice.org.uk/index/getadvice.htm
The TUC's WorkSmart website has an advice page on tax credits http://www.worksmart.org.uk/money/viewsubsection.php?sun=29 and the Low Incomes Tax Reform Group has a range of very useful advice pages: http://www.litrg.org.uk/help/lowincome/taxcredits The Community Legal Service has a page of links to specialist tax credit advice pages, at http://www.clsdirect.org.uk - click on 'where else can I get information?', then 'benefits' then 'tax credits'.
Acknowledgement
The TUC is very pleased to acknowledge the advice and assistance it has received from HM Revenue and Customs in producing this leaflet.
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