When you apply for most state benefits, a means tests will look at your capital and income. Working tax credits is not a means-tested benefit. It is an adjustment to your earnings based on your income alone.
It is only income from savings which affect tax credits, not the savings themselves. You can find a helpful explanation about tax credits and capital and savings.
So what protection is provided by a personal injury trust?
A personal injury trust does not protect you from tax, it only means the compensation should not be taken into account when assessing means-tested benefits.
If you are receiving another means-tested benefit you are automatically entitled to tax credit at the full rate. If you are only receiving tax credits, and no other means-tested benefit then income would normally be taken into account. But if the income is on an asset held in a personal injury trust and the income is paid into the trust, this income should not reduce working tax credits.
The answer lies in the The Tax Credits (Definition and Calculation of Income) Regulations 2002 . Follow the link and see paragraph 16 which excludes income “under a trust derived from a payment made in consequence of a personal injury…”
So that says if you can receive income from a personal injury trust, it will not be taken into account when calculating your entitlement to working tax credits. Good news for those who rely on working tax credit. There is a helpful note on the HMRC website which confirms this.
What you must do is include income received by a personal injury trust in your tax return. This applies if you have a bare trust, most personal injury trusts are bare trusts. You must also declare the income from the trust when applying for working tax credits, as if you do not the difference between your application and your tax return will be obvious. When declaring the income make sure you tell the Revenue about the trust and point to the Regulation above to explain why the income should not be taken into account.
This page will lose significance, as tax credits can no longer be claimed. Their role is replaced by Universal Credit, which is a means tested benefit, which takes account of funds over £6,000.
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