This is complicated but please bear with me.
The Maternity Leave Trap
Please read this if you have been overpaid tax credits and have been on maternity leave at any time since 2001.
In summary: for the purpose of tax credits HMRC give you a little "tax break" of Ј100 per week that a mum’s on Statutory Maternity Pay (see the “Income Details” notes in the TC600 Notes). This is great, in theory, but they request information on this at the wrong time and in the wrong way which virtually guarantees wrong payment and overpayment of tax credits (because, as we now know to our cost, tax credits are only provisional payments based on last year’s circumstances but then corrected at the end of the year based on actual income).
If you've been on maternity leave and been overpaid tax credits then this could well be one of the causes, and HMRC are at fault. They hadn't spotted it until we pointed it out to them on our visit 12th June 2007, but HMRC policy reps agreed it's problematic and I reckon you should argue HMRC error for any overpayment you've experienced as a result of what I’m calling the “maternity leave trap”. It’s so complicated, and even HMRC hadn’t thought about it, so it’s very reasonable for you to believe that your money was right.
Here’s a very basic example:
Your income for the last tax year Ј20,000
x Ј100 for SMP that year Ј17,400
So your Tax credits for the next year is calculated on Ј17,400 even though your income for the year ahead is likely to be Ј20,000 or higher if you’ve returned to work. So you’ll be overpaid tax credits.
This was much worse in the early years of tax credits as people were asked for income figures for 2001-2002, including the maternity leave deductions, EVEN THOUGH IT WAS PHYSICALLY IMPOSSIBLE to be on the same maternity leave when tax credits started in April 2003. And the unworkable salary disregard of just Ј2,500 meant that the maternity deductions could take you over this limit before any changes to your salary. Add in that HMRC took ages to update salary information (it took 9 months on our case, despite repeated requests) and you’ve got stacks of overpayments through no fault of your own.
If your maternity leave overlaps the tax years, or you return to work on fewer hours or less pay then the overpayment should be less, or balance itself out over the year, or might even lead to underpayment (I think, yet to test in practice). And the new, more realistic, income disregard of Ј25,000 should also help folk avoid overpayments (again, yet to test in practice).
However, the point remains that basing tax credits payments on old information, and not clearly explaining in any literature the implications (i.e. overpayments risks) of this is just one symptom of a poorly set up and even more poorly explained system. Don’t put up with it.
Well, that's my first attempt to explain the problem. Feel free to post questions, examples or successes fighting this and I'll do my best to get back to you.