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It doesn't last just one year.
It applies in each year when there is an increase in income over the previous year by more than £2,500.00. Where there is an increase of a lesser sum then the total increase is ignored.
In an example.
X has no reckonable income in year 2001 / 2002
X gets a job half way through the tax year in September 2003 providing reckonable income of £20,000.00 a year
In IR terms Xs income therefore is (PY = Previous year basis, CY = Current year basis):
2003/2004 - PY = £0 CY = £7,500 (£10,000 less £2,500)
2004/2005 - PY = £7,500 CY = £17,500 (£20,000 less £2,500 as £20,000 is more than £2,500 greater than £10,000)
2005/2006 PY = £20,000 CY = £20,000 (Steady state - no buffer)
This is the situation that provides many of the complexities in the situation. The amount of TC that is paid depends on which method of income assesment the client chooses - either are legitimate. In almost all cases where there has been an increase in income, remaining on a PY basis generates an interest free loan from the IR (loosely being called an overpayment) plus potentially an increase (often substantial) in HB in subsequent periods.
In the above example you will notice that in 2004 / 2005 the TC in payment, on a PY basis, will be:
a) higher because only the previous half year is being taken into account and because of the buffer
b) producing lower, if any, HB because the HB income is higher.
In 2005 / 2006 the TC amount will be lower because of:
a) loss of buffer produces higher reckonable income, less TC
b) Adjustment for previous higher payment (recovery of overpayment)
The net TC figure overall will be the same, in this case more of it will have been paid up front.
The lower TC figure will though produce a lower HB income in that year which will potentially generate higher HB, in typical figures often as much as £1,500 more in that year.
There are more complex scenarios which generate quire odd results but I'm not going to try and explain them here.
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