Debt Advice Handbook 14th editionChapter 7: Maximising income 4. Calculating entitlement
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4. Calculating entitlement
This section looks at the means tests for benefits and tax credits. There are common rules for the different benefits, but tax credits are calculated differently. It also refers to other issues which affect how much money the client is actually paid.
See CPAG’s Welfare Benefits and Tax Credits Handbook for more details.
Means-tested benefits
The basic formula for calculating means-tested benefits is as follows. See here for universal credit (UC). Note: most new claims will now be for UC.
    •Work out the client’s ‘applicable amount’ (see below).
    •Calculate the client’s income and capital.
    •For income support (IS), income-based jobseeker’s allowance (JSA), income-related employment and support allowance (ESA) and pension credit (PC), deduct the client’s income from the applicable amount.
    •The remainder (if any) is the amount of benefit. Housing benefit (HB) can still be awarded if income is above the applicable amount by applying a ‘taper’. Sixty-five per cent of the amount of income above the applicable amount is deducted from eligible rent. Any remaining rent is met by HB.
Applicable amounts
Applicable amounts are made up of a basic allowance for the client and her/his partner, plus additional amounts (called ‘premiums’) to take account of their circumstances. Amounts are included in HB for children.
Check that the client’s applicable amount includes all the premiums that are appropriate. Eligible housing costs for clients who are homeowners may also be included in the applicable amount of benefits other than HB. This includes certain service charges but does not include the cost of the client’s mortgage or loan to pay for home improvements. The client can instead be offered a loan to help with interest payments.
The terms used for PC are slightly different: the applicable amount is called the ‘appropriate minimum guarantee’ and premiums are called ‘additional amounts’. The extra amounts in ESA are called ‘components’.
Carer premium and carer’s additional amount
This is paid if the client is entitled to carer’s allowance (CA), even if s/he is not getting it because s/he gets an ’overlapping’ benefit (see here).
Family premium
This is paid in HB if the client has a child or ‘qualifying young person’ in the family. Clients who have been getting amounts in their IS and income-based JSA for their children since before April 2004 should also have a family premium included in their IS and JSA. A family premium is only paid in HB claims made before 1 May 2016 and in IS and income-based JSA where claims were made before 6 April 2004.
Disabled child premium
This is paid if a child receives disability living allowance (DLA) or personal independence payment (PIP) or is blind. It is available in HB. It can be included in IS and income-based JSA if the client still gets amounts in these benefits for her/his children.
Disability premium
This is paid if the client is registered blind or receiving a ’qualifying benefit’. These include DLA, PIP, the long-term rate of incapacity benefit, and the disabled worker or severe disability element in working tax credit (WTC).
Since the introduction of ESA in October 2008, the disability premium is generally not available on grounds of incapacity for work in any new claims for IS, income-based JSA or HB. Clients who were getting it on 27 October 2008 may still do so.
There is no disability premium in PC or ESA. There is also no disability premium in HB if a client is getting ESA. Instead, either a ’work-related activity component’ or a ’support component’ is included in her/his applicable amount.
Severe disability premium and severe disability additional amount
This is paid if a client receives a ’qualifying benefit’ (including attendance allowance (AA), the middle or highest rate of the DLA care component, or the standard or enhanced rate of the daily living component of PIP, and no one gets CA for looking after her/him). S/he must not have a non-dependant aged 18 or over normally living with her/him.
The rules for couples are more complicated. See CPAG’s Welfare Benefits and Tax Credits Handbook for details.
Note: there is no severe disability premium under UC and claimants receiving the severe disability premium receive a transitional SDP element if they move onto UC after 27 January 2021.
Enhanced disability premium
This is paid if the client or her/his partner is under pension age and receives the highest rate of the DLA care component or the enhanced rate of the daily living component of PIP. For HB only, in certain circumstances it can also be paid for each of the client’s children who receive the highest rate of the DLA care component or the enhanced rate of the PIP daily living component.
Pensioner premiums
Pensioner premiums can be paid in IS, income-based JSA and income-related ESA if the client’s partner has reached pension age (see here).
As PC is more generous, clients in these situations should claim PC instead. However, if the client is part of a couple where the other person is under pension age, s/he should seek advice before claiming PC, as s/he may be moved onto UC instead.
Employment and support allowance components
ESA has two additional components. A ‘support component’ is included if the client is severely ill or disabled; otherwise, a ‘work-related activity component’ is included. The work-related activity component has now been abolished for most new claims from 3 April 2017.
A component can only be paid once the initial assessment period is over and the client has had her/his capability for work assessed. Both components are paid at the same rate for couples as for single people.
Mortgage interest loans
From 6 April 2018, repayable loans replaced the previous benefit support for mortgage interest on certain loans secured on a client’s home. Clients getting IS, income-based JSA, income-related ESA or PC can qualify for a loan. The loans can cover the interest on mortgages or other payments used to purchase a home, or on a loan to pay for specified repairs or improvements.
A client should be advised to seek independent financial and legal advice before taking out a loan for mortgage interest.
The loans attract interest, which will continue to accumulate until the loan is paid or written off.
Clients can still get an amount for housing costs included in their benefit for service charges, ground rent, co-ownership schemes or certain types of rent.
Capital
A client cannot get means-tested benefits if her/his (and her/his partner’s) capital is more than an upper limit. Capital below a specified lower limit is ignored. Any capital between the two limits is assumed to produce a certain amount of income, called ‘tariff income’. This counts towards the client’s income when working out how much benefit s/he gets.
There is no upper capital limit for PC (and for HB if the client is entitled to the guarantee credit of PC), but any tariff income is still taken into account.
Capital includes:
    •cash;
    •the balance in any bank or building society current account or savings account;
    •the value of any National Savings and Investments products, including premium bonds;
    •the value of any shares, gilts, bonds and unit trusts.
Some forms of capital are ignored – eg, the client’s home and her/his personal possessions.
Income
Each of the means-tested benefits has different rules on what income and how much of that income is taken into account. The rules are, on the whole, more generous for PC (and for HB if the client is at least pension age) than for the other means-tested benefits. The income of couples is aggregated.
Most types of income are taken into account – eg:
    •earnings from a job;
    •profits from self-employment;
    •retirement pension;
    •other pensions;
    •WTC;
    •income from annuities;
    •some benefits, such as CA and bereavement allowance.
Clients can be treated as still having income if it is decided that they have deliberately deprived themselves of it in order to claim benefits or increase the amount to which they are entitled (known as ‘notional income’). Clients affected by this rule may need specialist advice.
There are many types of income that are disregarded, including some benefits – eg:
    •AA, DLA and PIP;
    •social fund payments;
    •child tax credit (CTC) and child benefit. However, for IS and income-based JSA, child benefit is taken into account unless the client is getting CTC.
Some of the client’s earnings can also be disregarded, depending on her/his circumstances. For HB, an amount is disregarded from earnings for childcare costs (up to £175 a week for one child or up to £300 a week for two or more children), if s/he works at least 16 hours a week, or if both partners in a couple work 16 hours or more a week. If only one partner works, they can still qualify if the other is incapacitated, or in hospital or prison.
Universal credit
UC is calculated as follows.
    •Add together the various ’elements’ to which a client is entitled (see here) to arrive at a ’maximum amount’.
    •Deduct any unearned income (see here).
    •Deduct 63 per cent of net earnings after disregards (see here).
    •The remainder (if any) is the amount of UC payable.
Elements
UC is made up of a standard allowance for the client and her/his partner, plus additional amounts (called ‘elements’) to take account of their circumstances.
Check that the client’s UC includes all the elements that are appropriate.
Child element
This is an amount for each child aged under 16 or young person aged between 16 and 18 (or 19 in some cases) who is in ‘non-advanced education’. From April 2017, the child element is limited to two children. This ‘two-child limit’ (generally) only applies to third or subsequent children born on or after 6 April 2017. There are exceptions.
Disabled child addition
An additional amount is included in a client’s UC if her/his child gets either DLA or PIP. A higher amount is included if the child gets the highest rate of the DLA care component, the enhanced rate of the PIP daily living component, or is certified as severely sight impaired or blind.
A disabled child addition can still be included even if the client does not receive a child element for the child because of the ‘two-child limit’ (see above).
Limited capability for work element
This element is paid if a client is assessed as having ‘limited capability for work’. However, it has been abolished for most new claims from April 2017.
Note: usually a client will not be paid this element for at least three months, although there are some exceptions for those with previous claims.
Limited capability for work-related activity element
This is paid if a client is severely disabled or ill and is assessed as having ‘limited capability for work-related activity’. It is paid at a higher rate than the limited capability for work element.
There is generally a ‘waiting period’ of at least three months before this element is paid. However, people who are considered terminally ill (ie, expected to die within six months) are awarded the element straight away. There are some further exceptions for those with previous claims.
Carer element
A carer element can be included if a client is in receipt of CA or cares for a severely disabled person for at least 35 hours a week. The disabled person must be getting AA, the middle or highest rate of the DLA care component or either rate of the PIP daily living component.
Housing costs element
A housing costs element can be included in a client’s UC to cover rent and/or some service charges. Note: owner-occupiers may get an amount to cover certain service charges.
The amount included to cover rent depends on the size of the client’s family and her/his circumstances. Most housing association and local authority tenants have their rent paid in full. However, the housing element may be reduced if the property is considered to be bigger than they need (known as the ‘bedroom tax’).
Tenants with private landlords have their housing costs element limited to the ‘local housing allowance’ for the size of property they are assessed as needing.
The housing element may also be reduced if the client has one or more ‘non-dependants’ living with her/him (eg, a friend or relative). The reduction is a set amount, irrespective of whether or not the client receives a contribution from her/him. No deduction is made if the non-dependant is getting either the middle or highest rate of the DLA care component or either rate of the PIP daily living component, or if s/he is aged under 21.
If the housing element does not cover the full amount of her/his rent, the client can apply for a discretionary housing payment, which is paid by the local authority.
Clients who own their own homes and are not doing any paid work can apply for a loan for mortgage interest to help with the interest on any loan secured on the property that they occupy as their home, whatever the purpose of the loan. A client should be advised to seek independent financial and legal advice before taking out a loan for mortgage interest. The loans attract interest, which will continue to accumulate until the loan is paid or written off.
Childcare costs element
Clients can get help with childcare costs in their UC if they are in paid work (or about to start paid work) and are paying for ‘formal’ childcare, such as a registered childminder, nursery or after-school club. The client must be:
    •a lone parent;
    •a member of a couple and both are working; or
    •a member of a couple and one is working and the other has limited capability for work, is caring for a disabled person or is temporarily away from home.
The amount of the childcare element is 85 per cent of the client’s actual childcare costs, up to a fixed maximum, depending on the number of children.
Income
Income is assessed on a monthly basis, with the date of the assessment period starting on the first day of entitlement to UC.
Net earnings (after tax, national insurance and occupational pension contributions) are taken into account as income. Details are provided directly to the Department for Work and Pensions (DWP) by HM Revenue and Customs (HMRC). If the client or their partner is responsible for a child or has limited capability for work, they will benefit from a ‘work allowance’. Earnings lower than the work allowance are ignored. If earnings are above the work allowance, or if the client is not entitled to a work allowance, the amount of her/his UC is is reduced by 63 per cent of the difference between the allowance and the earnings - ie, every pound of earnings reduces the client’s benefit by 63 pence.
Unearned income taken into account includes JSA, ESA, CA, maternity allowance (MA), pensions, annuities, ‘notional income’ (see here), student income, spousal maintenance and ‘tariff income’ from capital of between £6,000 and £16,000 (see below).
Some income, including DLA, PIP, child benefit and child maintenance, is disregarded.
Capital
Clients with capital of more than £16,000 cannot claim UC. Capital of less than £6,000 is ignored. Capital between £6,000 and £16,000 is subject to ‘tariff income’ – this means that benefit is reduced by one pound per week for every £250 over £6,000.
The benefit cap
The total amount of benefits that can be received by a client who is receiving HB or UC is limited to:
    •outside Greater London: £257.69 per week for single people; £384.62 for couples and lone parents;
    •in Greater London: £296.35 per week for single people; £442.31 for couples and lone parents.
A client’s benefit income cannot therefore be maximised above this amount. There are a number of exceptions, when the benefit cap does not apply (see below).
The benefit cap is usually administered by the DWP and local authorities and is applied by reducing the amount of UC or HB. If the client is receiving HB, only the HB is reduced. However, if the client claims UC, the benefit cap applies to the whole amount of UC payable, not just the housing element.
The following benefits are included when working out whether or not the cap should be applied:
    •bereavement allowance;
    •child benefit;
    •CTC;
    •ESA (unless it includes a support component);
    •HB;
    •incapacity benefit (IB);
    •IS;
    •JSA;
    •MA;
    •severe disablement allowance (SDA);
    •widowed mother’s allowance, widowed parent’s allowance and widow’s pension;
    •UC.
Clients who are (or whose partner or child is) getting AA, WTC, PIP, ESA support component, CA, guardian’s allowance, a war pension, industrial injuries disablement benefit, or UC that includes the limited capability for work-related activity component or the carer component, are exempt. If a client has worked recently, the cap is not applied for a grace period. Clients on UC who have earnings above a specified limit are also exempt.
Overlapping benefit rules
Special rules mean that a client cannot be paid more than one of the following non-means-tested benefits at the same time:
    •contribution-based JSA;
    •IB;
    •contributory ESA;
    •MA;
    •retirement pension;
    •widow’s pension or bereavement allowance;
    •widowed mother’s or widowed parent’s allowance;
    •SDA;
    •CA.
Clients entitled to more than one of the above benefits are paid the benefit that takes priority, with a top-up of any other of the benefits if appropriate.
Deductions from benefits
Clients can have deductions made from their benefit for a variety of reasons, which means the amount they are paid is less than their entitlement.
Benefit penalties for failing to take part in work-focused interviews can apply to a number of different benefits depending on the client’s circumstances. Benefit sanctions can apply to UC, JSA and ESA, which mean that a client’s benefit can be reduced or not paid at all.
Overpayments of benefits are usually recovered by making deductions from a client’s ongoing entitlement. If a client is challenging the overpayment, s/he should ask for deductions to stop. Overpayments of UC can continue to be deducted while the client is challenging the overpayment. Note: Deductions for overpayments (including tax credit overpayments) can be made for statute-barred overpayments as the Limitation Act 1980 only applies to ‘action’ involving court proceedings.1s108 Welfare Reform Act 2012
Deductions for budgeting loans or payments in advance can be made from UC and the rate of repayment can be very difficult to negotiate once agreed by the client.
Deductions for a wide variety of charges or debts (eg, for fuel or rent arrears) can be made from benefits – usually, the means-tested benefits: IS, income-based JSA, income-related ESA, PC and UC. For more information, see here.
 
1     s108 Welfare Reform Act 2012 »
Tax credits
The basic formula for calculating tax credits is as follows.
    •Work out the number of days in the client’s ’relevant period’. Both CTC and WTC are awarded for the tax year, so a claim made in July runs until 5 April – the number of days in this period is the ’relevant period’.
    •Work out the ’maximum amount’. Add together all the elements of CTC and WTC to which the client is entitled.
    •Work out relevant income. Income is annual income and is calculated in accordance with the tax rules – basically, all taxable income is counted. There is no capital limit, but taxable income from capital counts as income.
    •Compare this with a ’threshold figure’.
    •Calculate entitlement. If the income figure is below the threshold, the client gets the maximum amount. If it is above, it is reduced by a taper. Forty-one per cent of the client’s income above the threshold is deducted from the maximum amount. The remainder is the amount of tax credits paid.
Clients on IS, income-based JSA, income-related ESA and PC receive the maximum entitlement.
The amounts that make up CTC are:
    •family element. Note: this is only payable if the claim includes a child born before 6 April 2017;
    •child element. Note: a child element is not payable for a child born on or after 6 April 2017 if the client already has two or more children included in the award. There are exceptions to this general rule;
    •disabled child element, payable at a higher rate if the child is severely disabled.
The amounts that make up WTC are:
    •basic element;
    •lone parent element;
    •couple element;
    •30-hour element;
    •disabled worker element;
    •severe disability element;
    •childcare element.
HMRC uses the previous tax year’s income to make an initial award for the year (although it can use an estimate of income for the current tax year instead). At the end of the tax year, it finalises the award by comparing the client’s actual income over the year of the award with that of the previous year. This could result in an underpayment, which HMRC pays back in a lump sum, or an overpayment that may have to be repaid. Decreases in income of less than £2,500 are ignored. Increases in income of less than £2,500 from one year to the next are also ignored.
Overpayments of tax credits are common and many clients have some kind of adjustment to their award. This, combined with the complexity of the system, means it is often difficult to establish whether or not a client is being paid the correct amount. Specialist advice may be needed.
Some changes of circumstances must be reported and taken into account during the year and carry a potential penalty if not reported. Other changes can be reported at the end of the year, but may result in underpayments or overpayments. Bear this in mind when giving advice about whether and when to report a change during the year.
Tax credits vs universal credit: a better-off calculation
One consideration is whether a client is better off by voluntary transferring from a legacy benefit to UC. The new rules on income disregard/taper only apply to UC claimants in work and not tax credit recipients. This has created a two-tiered system of in-work support. While some people are better off voluntarily transferring to UC (to take advantage of the disregard/taper), other people, specifically those with savings of more than £6,000, are better off waiting to be mass migrated and making use of the one-year assets disregard.
 
Mass migration
In conjunction with DWP, HMRC is mass migrating legacy benefit claimants over to UC. A legacy benefit is a current claim for:
    •CTC;
    •WTC;
    •HB;
    •IS;
    •income-based JSA;
    •income-based ESA.
The current plan is to complete the transfer by September 2024, though this may be extended.
Migration to UC is by one of three ways.
    •Voluntary migration, which is when the client opts to transfer to UC.
    •Natural migration, on a relevant change of circumstances:
      ◦employment status;
      ◦family circumstances;
      ◦a partner leaving or joining the household;
      ◦starting or stopping being a carer;
      ◦starting or stopping a claim based on disability; and/or
      ◦moving home and taking up a new tenancy.
Entitlement to a legacy benefit ends, and a claim for UC must be made.
    •Managed migration, which is when the DWP contacts the client and informs them that entitlement to tax credits and other legacy benefits will end in three months and to continue receiving support, the client needs to claim UC.
 
A better-off calculation
In April 2021, the £20 per week coronavirus uplift was removed for tax credit claimants. The uplift was removed for UC claimants in September 2021 and replaced by:
    •an increase in the UC work allowance; and
    •a reduction in the in-work taper.
The increase/reduction only applies to UC claimants in work.
In terms of entitlement to benefit, some in-work clients currently claiming tax credits may be better off transferring over to UC.
When considering if an in-work client may be better off voluntarily transferring to UC, there are a number of issues that need to be taken into account.
The ‘lobster trap’ rules apply - once a claim for UC is made, claimants cannot return to legacy benefits if the application is refused.
Under managed migration only, transitional protection will be included in the UC calculation. If the client would be financially worse off under UC, they will receive additional UC included in the calculation.
Different rules apply with regard to savings.
    •For tax credits, only interest paid from savings is taken into account as income.
    •UC has a bar of £6,000. For any savings above £6,000, entitlement to UC is reduced by £1 per week for every £250 (or part of). A bar applies at £16,000. All entitlement to UC ends if assets exceed £16,000.
For clients with savings of more than £16,000, the savings are disregarded for one year if they were entitled to tax credits immediately before becoming entitled to UC under the managed migration process.
When comparing a current award of tax credits/HB with a potential claim for UC, the better-off calculation needs to be based on the actual entitlement to tax credits, not the amount paid to the client - there may be a recoverable overpayment of tax credits being deducted at source.
If the client has (on a pro-rata basis) experienced an increase in income of more than £2,500 since the last tax credit review, an overpayment of tax credits will have occurred. This overpayment is transferred to the DWP for collection through a deduction from UC.
If the client is better off by transferring to UC, the additional income in UC may affect any ongoing claim for council tax reduction.