All about the 10% clause
We don’t want to bore you with every clause included in your IVA, we just know through experience that this is an important one to know. It catches out a lot of people who simply weren't made aware that this exists. And people aren’t aware because some companies will keep this from you as it could put you off applying for an IVA with them.
The information contained here isn’t designed to put you off, it’s designed to inform you and make you aware of all the facts. Once you are aware it will hopefully make the running of your IVA much smoother as this clause must be the number one reason why IVAs are extended, or even fail.
Please note that this isn’t officially called the 10% clause, or the 10% rule, we’ve just taken the liberty of giving it a name to make it easier to understand. Let’s take a closer look.
What is the “10% clause?”
At the beginning of your IVA, the company you are applying through will do an assessment of your income and outgoings. Let’s just say when you start your IVA your monthly income is £1,000. Each month you are allowed to earn 10% on top of this, so in this case you could earn up to £1,100.
Let’s say one month, maybe through overtime or a salary increase you earn £1,200. That means you’ve gone over your £1,100 limit by £100. The rules of the IVA state you must pay half of whatever you have gone over by. So, in this example you would have gone over by £100, therefore £50 would need to be paid into the IVA – this is called an additional payment. That, in a nutshell, is the 10% clause.
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Changes in income during your IVA
Carrying on from the example above, let’s say your monthly income has now permanently increased to £1,200, does this mean you’ll have to pay an additional £50 every month? In short, the answer is no.
If your income increases permanently you should let the company overseeing your IVA know right away. They will carry out a new assessment of income and outgoings. The assessment will set your income at £1,200, pushing up your 10% leeway to £1,320. Now when you earn £1,200 you won't have to pay the additional £50.
What you may have guessed though is as a result of your new income and outgoings review, your regular monthly payments are likely to increase. While this is probably true, unless your outgoings have seriously reduced, your payments will not go up by the whole £200 more you’re now bringing into the household.
Continuing on from the example above, let’s say your income was £1,000 and your IVA payments were £80. You then receive your £200 pay rise. There are a few factors why your payment increase won’t be as much as £200, leaving you overall better off as a result of your pay increase.
- Your outgoings are also taken into consideration, if your pay rise is due to a new job you may have more outgoings such as fuel or travel costs. This will be taken into consideration.
- After taking into consideration your new income and outgoings, let’s say it’s established you are £40 better off per month. The rules off the IVA would ask you to increase your payments by half, so in this case increase by £20, taking your new payments from £80 to £100.
Tips on what you should do
- When your income changes speak with the company who is overseeing your IVA straight away.
- If you think you might owe money into your IVA, deal with it immediately, don’t let it wait.
- Any extra income that is only received from time to time should be dealt with as and when you receive it.
Why your IVA might be extended
If you forget or didn’t realise there was a 10% rule, but you have been earning over your 10% leeway, then what happens? Well, because on your IVA you will complete a review every year, part of this review is to look at your income over the 12 months. The IVA company will realise you have earned more, work out how much you need to pay in, and advise you how much. The problem is, unless you’ve been very sensible with your money, you’re unlikely to be able to pay this amount as a lump sum.
In these circumstances you’ll have to come to an arrangement with your IVA company to pay this amount. You can usually do this by dividing the sum over several payments, or by adding some months onto the end of the IVA in order to pay in the money. Your IVA will not be able to complete until this has been paid in.
If you’re about to receive, for example, your annual bonus but you need money for something, such as repairing your car or something in your home, remember first of all that you can keep half of the amount you’ve gone over your leeway by. If this isn’t enough then speak with your IVA company. The Insolvency Practitioner could allow you to keep some of it, especially if it’s for something essential like repairing your car.