Credit union

Tax credit change 'may cause hardship'

A credit union is a member-owned financial cooperative, democratically controlled by its members, and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members.[1][2] Worldwide, credit union systems vary significantly in terms of total system assets and average institution asset size, ranging from volunteer operations with a handful of members to institutions with assets worth several billion US dollars and hundreds of thousands of members.[3] Credit unions operate alongside other mutuals and cooperatives engaging in cooperative banking, such as building societies.

"Natural-person credit unions" (also called "retail credit unions" or "consumer credit unions") serve individual people, as distinguished from "corporate credit unions," which serve other credit unions

Families who have been overpaid tax credits will have to repay the money at a much faster rate from now on, under government changes.

Tax credit claimants with a household income of more than £20,000 will see any historic overpayments clawed back at a much faster rate. The UK tax authority said this would cut the time that people spent in debt. But campaigners have argued that some claimants will face "serious financial hardship".

Paying back

Entitlement to tax credits - a top-up for those on low incomes - is generally calculated by referring to a claimant's previous year's income. Sometimes, pay rises or more hours of work mean that claimants may receive too much from the tax credits top-up. This money then needs to be repaid to HM Revenue and Customs (HMRC). The amounts of overpayment can sometimes be quite high, but families may have spent the money, so find it difficult to repay. Repayments are often made by reducing subsequent tax credit awards, and it is this cut in payments that has been changed. Previously, payments were reduced by a maximum of 25% in order to pay back outstanding overpayments. Under changes newly in force, but announced in the March 2014 Budget, those who still owe money to HMRC will see their latest tax credit award cut by up to 50%, if they have a household income of more than £20,000. It is understood that HMRC want to retrieve previous overpayments quicker, so the books are settled before benefit claimants move over to the new system of Universal Credit.

'Serious hardship'

Campaigners are concerned that clawing back the money too quickly could leave some families in financial difficulty. "We fully support the need for HMRC to recover overpayment debt, but this should not be at such a rate that it has the potential to plunge people into serious financial hardship," said Anthony Thomas, chairman of the Low Incomes Tax Reform Group. "This change is likely to catch people out, as they may not be aware that their payments are about to reduce by an additional 25%. This is likely to hit those with high childcare costs or who receive extra payments due to disability even harder, as their awards will be higher." The group is calling on HMRC to protect those with high childcare costs or who receive payouts owing to disabilities to be protected from the new, faster, repayment system. A spokesman for HMRC said: "This change is simply about recovering overpayments faster and more efficiently. It will allow customers to return to full payments sooner and reduce the burden on families who previously would have repaid their debt at a slower rate. "We wrote to all affected tax credits customers to tell them about the measure in March, so that they can manage any potential change to their finances. If anyone is worried about being unable to pay their debt, they should get in touch with HMRC as early as possible, so that we can help." The government says some of those affected will benefit from higher pay, thanks to the National Living Wage, and more generous tax allowances.

Differences from other financial institutions

Credit unions differ from banks and other financial institutions in that those who have accounts in the credit union are its members and owners,[1] and they elect their board of directors in a one-person-one-vote system regardless of their amount invested.[1] Credit unions see themselves as different from mainstream banks, with a mission to be "community-oriented" and "serve people, not profit".

Credit unions offer many of the same financial services as banks, but often using a different terminology; common services include share accounts (savings accounts), share draft accounts (checking accounts), credit cards, share term certificates (certificates of deposit), and online banking.[1] Normally, only a member of a credit union may deposit or borrow money.[1] Surveys of customers at banks and credit unions have consistently shown a significantly higher customer satisfaction rate with the quality of service at credit unions.[8][9] Credit unions have historically claimed to provide superior member service and to be committed to helping members improve their financial situation. In the context of financial inclusion credit unions claim to provide a broader range of loan and savings products at a much cheaper cost to their members than do most microfinance institutions

Not-for-profit status

In the credit union context, "not-for-profit" is not the same as for a "non-profit" charity or similar organization.[11] Credit unions are "not-for-profit" because their purpose is to serve their members rather than to maximize profits.[10][10][11] But, unlike charities and the like, credit unions do not rely on donations, and are financial institutions that must perforce make what is, in economic terms, a small profit (i.e., in non-profit accounting terms, a "surplus") to remain in existence.[10][12] According to the World Council of Credit Unions (WOCCU), a credit union's revenues (from loans and investments) must exceed its operating expenses and dividends (interest paid on deposits) in order to maintain capital and solvency.[12]

F.W. Raiffeisen wrote in 1870 that credit unions "are, according to paragraph eleven of the German law of cooperatives, 'merchants' as defined by the common code of commerce. They accordingly form a sort of commercial business enterprise of which the owners are the Credit Unions' members".[13] In the United States, credit unions incorporated and operating under a state credit union law are tax-exempt under Section 501(c)(14)(A).[14] Federal credit unions organized and operated in accordance with the Federal Credit Union Act, and they are tax-exempt under Section 501