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COVID-19: Impact of reduced hours and furloughing on working tax credits

Updated 7 May: Entitlement to working tax credits varies according to the number of hours worked. The Tax Faculty explains the impact of reduced working hours, temporary lay-offs and furloughing on tax credits and when HMRC needs to be informed.

7 May update: HMRC has announced that the eight week period to notify temporary changes in working hours has been extended. Tax credit claimants who are temporarily not working or working reduced hours due to coronavirus do not need to notify HMRC until the Job Retention Scheme and Self-Employment Income Support Schemes close. This applies even if the claimant is not using one of these schemes. Claims will continue to be based on normal working hours before any temporary reduction.

The thresholds for working tax credits (WTC) are 16, 24 or 30 working hours depending on circumstances. The number of hours is based on ‘normal working hours’ and temporary changes do not need to be reported.

Temporary was previously interpreted by HMRC as being four weeks, but it is understood that this has been temporarily extended to eight weeks during the coronavirus crisis and we await further guidance on what will happen after eight weeks. It should be noted that the official guidance still refers to four weeks.

This table summarises the impact and the action that WTC recipients need to take:

 Change in circumstances Impact on WTC  Action required
Temporary reduction in hours to less than the relevant threshold No change to normal hours for entitlement purposes for at least eight weeks Check after eight weeks whether the period has been extended. If it has not, inform HMRC
Permanent reduction in hours to less than the relevant threshold Entitlement will change, a four-week run-on will apply if entitlement ceases completely  Inform HMRC immediately
Temporary lay-off  No change to normal hours for entitlement purposes for at least eight weeks Check after eight weeks whether the period has been extended. Inform HMRC immediately if the lay-off becomes permanent.
Furloughed No change to normal hours for entitlement purposes for at least eight weeks Check after eight weeks whether the period has been extended.
Self-employed with reduced working hours As long as you are still trading, no change to normal hours for entitlement purposes for at least eight weeks Check after eight weeks whether the period has been extended. Inform HMRC immediately if you cease trading.

When the new tax year starts on 6 April 2020, WTC claimants should give HMRC a revised estimate of income for 2020/21 so that it can adjust the tax credit award. Income may be more difficult to estimate than usual, but care should be taken not to underestimate income due to the risk of creating an overpayment of WTC.

Working hours are not a factor in calculating universal credit claims, which are recalculated monthly based on current circumstances.

Further information is available in these Tax Faculty guides: