Entitlement to Working Tax Credit (WTC) normally depends on the claimant normally working a certain number of hours.
Where someone's hours have dropped then whether they stay on Tax Credits or not will usually depend on whether they are still working the required hours to be entitled and how long the drop in hours is expected to last.
Where the drop is going to be less than 4 weeks, then WTC can continue.
Where the drop is going to be more than 4 weeks the claimant needs to report this to HMRC and WTC will end after that 4 week period - due to the 4 week run-on.
HMRC did put in place some temporary measures so that people who were temporarily working reduced (or no) hours due to coronavirus, or who were being furloughed, were treated as though they were still working their normal hours - so long as they were still employed or self-employed. See this page for more information..
Closing the business
Where a self-employed Tax Credit claimant decides to close their business permanently, then they will need to report this to HMRC as this is not a temporary change.
They will be entitled to the 4 week run-on (see below). Once the WTC has ended (ie after the 4-week run-on) they would need to think about claiming Universal Credit.
They might want to consider whether they could be better off claiming Universal Credit sooner ie rather than after the 4 week on (eg if they have rent to pay and they are not getting any Housing Benefit).
Every situation is different – it is best to speak to a Benefits Adviser.
4 week run-on
There is a special rule that says WTC can run on for 4 weeks when someone stops work, or their hours are reduced below the number required for WTC.
Even though someone's earnings have dropped they will not see in increase in their Tax Credits during the 4 weeks ie the Tax Credit award will remain the same.
They should check with a Benefits Adviser if Universal Credit would be a better option for them, rather than the Tax Credits run-on.
What about Child Tax Credit?
Child Tax Credit is not dependent upon hours worked. So someone's whose income has dropped can stay on Child Tax Credit.
Will Tax Credits increase if earnings drop?
If the claimant remains entitled to Working Tax Credit then their award can only be increased if the claimant’s annual income reduces by £2,500 or more.
Many self-employed people received grants from the Self Employment Support Scheme. The SEISS payments counted as self-employed income for Tax Credits.
What about paying the rent?
Anyone who already gets some Housing Benefit should let the HB Office know about the drop in income, as their HB should increase due to the drop in earnings.
Tax Credits claimants who are not already on Housing Benefit will not be able to make a new claim for HB. Instead, if someone is struggling to pay their rent, they might think about Universal Credit. But note that once on UC, Tax Credits will end. Some people are worse off financially on UC. So they should speak to a benefits adviser to get a better off calculation.