March 2009

March 2009


Tax Credits

Nine out of ten families with children get tax credits, but you don’t need to have children to qualify.  You may also qualify if you are working and earning low pay.

How much do you get?

The amount of tax credits you get depends on things like:

  • How many children you have living with you
  • Whether you work – and how many hours you work
  • If you pay for childcare
  • If you or any child living with you has a disability
  • If you’re aged 50 plus and are coming off benefits

Your payments also depend on your income.  The lower your income, the more tax credit you can get.

Example 1:  Mr and Mrs Khan both work full-time.  Between them, they earn about £25,000 a year.  They have three children and they get £55 a week in tax credits.  If their income was higher, and they earned about £50,000 a year, they’d get about £10 a week instead.

Example 2:  Jon Barry is aged 30, not married and lives alone.  He works full-time and earns £10,000 a year.  He gets about £12 a week in tax credits.

(Source: HM Revenue & Customs website)

In the current climateof falling incomes you may now qualify when you previously did not.  To find out if you qualify why not use HM Revenue & Customs online questionnaire, just click here to be redirected to this questionnaire.

Everyone hears in the press about the vast number of overpaid tax credits, however little or no publicity has been given to the significant number of people who have underpaid tax credits.

Tax credits are provisionally based on the previous years income.  The final entitlement will then be calculated on your actual income for the year and any differences calculated.  However, if the difference is below £25,000 then no adjustment will be made!

If your income is expected to drop in the current year, it is important you alert the Revenue as you could be getting more tax credits.  Unless your next year profits rise by more than £25,000, your tax credits for two years could be increased.

Another way to maximise your tax credits is to put a lump sum into a pension scheme.  However, this does depend upon your income levels as family tax credits do not vary with income between £26,368 and £50,000.

Example 1:  A family with income of £60,000 decides to put a lump sum of £8,000 into a pension scheme (£10,000 gross), the family income is reduced to £50,000 and they receive an extra £545 of family tax credits.

Example 2:  A family with income below £26,368 decided to do the same.  Their tax credits increase by £3,700 or 37%.

With the 2 year effect and the 20% basic rate tax relief on the pension contribution, this could mean a 94% tax deduction (20% + 37% + 37%) for a pension contribution.

The table below shows the various element of tax credits:

Baby addition£545£545
Child (per child)£2,085£1,845
Disabled child (per child)£2,540£2,240
Enhanced disabled child£1,020£980
First income threshold£15,575£14,495
Wihtdrawel rate39%37%
Second income threshold£50,000£50,000
Withdrawel rate6.67%6.67%
Minimum working tax credit£1,800£1,730

Annual Investment Allowance (AIA)

AIA started on 6 April 2008 (1 April for companies) giving 100% tax relief on the cost of equipment or commercial vehicles purchased for use in a business up to a total of £50,000 in each financial year.  At the same time the annual writing down allowance on general pools and expenditure in excess of the £50,000 was reduced from 25% to 20% per year.

For periods straddling 6 April 2008 (1 April for companies) a hybrid allowance will be used on a time apportionedpro-rata basis.  Your AIA in this period will also be restricted on the same basis.

Acquiring equipment or commercial vehicles on hire purchase still allows 100% relief against taxable profit to be claimed on the financed base costs of assets up to £50,000 per year.

The reduction in profit that arises from this relief may have a very significant effect on available individual tax credits.  The large reduction in taxable profits will mean you can receive higher tax credits.  Although the AIA only applies for 1 year, due to the averaging methods used in calculating tax credits, you may receive higher credits for up to 2 years.  This can potentially fund the majority of the purchase.

Example 1:  Miss X needs to purchase a van for her business and currently has steady profits of £27,000.  She receives tax credits.  The new van would cost £18,000 and is eligible for the AIA so Miss X would received 100% as a deduction to her annual profit (her revised profit being £9,000).

As her tax credits award for the year was originally based on a profit of £27,000, she will now be owed a lump sum award of around £7,000.  Providing her next years profits do not exceed £34,000 (£9,000 + £25,000), she will receive an additional £7,000 tax credits next year.

Final Result:  Miss X will receive £3,600 of tax relief and £1,440 NI relief on the purchase of the van using the AIA.  In additional she will receive 2 x £7,000 of increased tax credits, leaving a total benefit of £19,040.

(Source: Tips & Advice Tax, a fortnightly newsletter covering business and personal tax.                                          For subscription info. call 01233 653500)

An additional relief was also announced enabling the writing off, in full, the balance of small capital allowance plant pools in the year when they fall below £1,000.

Business Payment Support – Revisited

Many companies have taken advantage of the Governments facility to defer the payment of tax by individuals and companies which are suffering cash flow problems as a result of ‘the credit crunch’.  It has been estimated that HMRC, to date, have deferred £130 million of taxpayments.

There is however a point of caution.  You must contact the HMRC helpline before the due date for any tax payments you wish to defer and agree a payment strategy.  If you do not contact the helpline, HMRC may still pursue your tax payments though debt collection agencies if necessary.