Wednesday, May 30, 2012

Business owner? Don't forget tax credits!

Tax credits are something that most accountants don't like to deal with. They are often considered as social benefits and therefore something that is outside of the scope of their offering. It is difficult however to advise properly on the tax affairs of an individual or a company without taking child and working tax credits into account. Indeed, many decisions you can take as a business owner will have consequences on eventual tax credits and your bottom line.

It is often assumed that tax credits are only available to the unemployed or the very low earners. What people forget is that there are some instances where your earnings can be very low for a limited period (say you start a new business or you incur exceptional capital expenses). In that case there is no reason not to claim this extra government money. Especially since, because tax credits are based on income and not capital, it is possible to be in a situation where you have significant capital gains, inheritance income or just savings and where you are still entitled to those subsidies.

You can claim either the child tax credits (if you have children) or the working tax credits (if your are working) or both. In either case (and contrarily to income tax) the calculation is based on household income and the more your earn, the smaller the benefit will be.

Let's look at an example:

John and Mary are married with 2 children for whom they have to pay childcare (48 weeks in the year). John's income from sole trade in 2012/2013 is £25,000. He also received £16,000 in inheritance. Mary's salary income is £8,000.

In that case, the maximum award is as follows:

Child Tax Credits
   2 x child elements£5,380
   Family element£545
Total CTC£5,925
Working Tax Credits
   1 x basic element£1,920
   1 x couples element£1,950
   1 x 30 hour element£790
   Childcare - £300 x 48 wks  £10,080
Total WTC£14,740

But in order to claim the maximum award you need to have low earnings, which at first sight seems not to be the case. However, the inheritance money is not considered income and therefore the household income is just £33,000. Also, as John does not need the money from the inheritance, he decides to put it into a pension which effect is to reduce his income by £20,000 (gross contribution) to £13,000.

The award will therefore be restricted by £13,000 minus £6,420 x 41% ie. £2,698, resulting in a tax credit award of  £17,967! Definitely worth the effort...

This article is too short to go into the details of the calculations but you should definitely talk to us if any of the following conditions apply:
  • You are a sole trader who plans to incorporate
  • You have just started a business and will make losses initially
  • You are planning on buying equipment (such as a van) 
  • You have inherited or made a capital gain that you don't need now
  • You just came back from maternity leave
  • Or you just have a low income...
Keep in mind that if you are entitled to tax credits, and you don't claim them, they are lost. And any application that you make can only be backdated by a month, so the more you wait, the more you lose.

Our initial consultation is free of charge and we will be able to give you an estimate of your tax credits on the spot. So contact us now to arrange a meeting. 

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