Business Tax Credits

Business Owners Can Also Claim Tax Credits

People tend to think Tax Credits are just for poor families. Completely untrue! Few people realise just how high your income can be before you cease to be eligible, or just how much is available even when you have no children.

A family with two children and household income of £40,000 could still claim up to £7,737 in the 2012/13 tax year; a working couple with no children could claim up to £4,660!

With many business owners experiencing a fall in income, many who have never claimed Tax Credits before stand to benefit – IF they make a claim!

Don’t wait for your accountant to tell you about this. Most refuse to deal with Tax Credits and, in any case, there’s a strong chance they won’t look at your accounts in time: from 2012/13, the deadline for a full claim is 5th May each year – any later and you will lose part of your entitlement.

Taxable Household Income

The first thing to understand about Tax Credits is they are based on household income. A couple living together make one claim based on their combined income.

Secondly, Tax Credits are based on taxable income (with an exemption for the first £300 of investment income). Any planning you do to reduce your taxable income could therefore also create or increase a Tax Credit claim.

Points Mean Prizes

Tax Credits are awarded on a points system. The more points you earn, the more money you get. Points are earned for doing the things the Government likes you to do: working and having children!

A single person aged 25 or over working at least 30 hours a week is entitled to £2,710. Add a further £1,950 if you are a co-habiting couple or single parent. (Remember couples can only make one claim.) Parents working 16 to 29 hours a week also qualify but get £790 less.

Now add the £545 ‘family element’ if you have any eligible children, plus a further £2,690 per child. Count all children under 16 and 16 to 18 year-olds in full-time education.

Adding this up gives Tax Credit entitlements of £4,660 for a childless couple; £7,895 for a family with one child and a further £2,690 for each additional child. The more children, the more Tax Credits: there’s no limit!

But there’s more. Working parents can also claim further Tax Credits equal to 70% of eligible childcare costs up to £175 per week for one child or £300 per week for two or more children. That’s up to £10,920 extra per year.

Withdrawals

Once household income exceeds £6,420, you start to lose your Tax Credits at the rate of 41p per £1 of additional income. This withdrawal of Tax Credits is why many people believe they are unlikely to benefit. But just look at the table below:

No. of Children	Claim with £30,000 income	Claim with £40,000 income	Claim with £50,000 income	Maximum Income
1	£4,597	£497	£0	£41,213
2	£11,837	£7,737	£3,637	£58,871
3	£14,527	£10,427	£6,327	£65,432
4	£17,217	£13,117	£9,017	£71,993
5	£19,907	£15,807	£11,707	£78,554
6	£22,597	£18,497	£14,397	£85,115

‘Maximum Income’ is the point where Tax Credits are withdrawn altogether. This is pretty high for a large family; even with just two children, it’s nearly £60,000.

These figures include maximum eligible childcare costs but, even without these, a family with four children and income of £40,000 is still eligible for £2,197 – well worth claiming!

Don’t Miss the Boat

Tax Credit claims are initially based on your previous year’s income. A claim for the year ending 5th April 2013 (2012/13) is initially based on your taxable income for the year ending 5th April 2012 (2011/12).

For sole traders and partners, this generally means initially looking at trading accounts for periods ending between 6th April 2011 and 5th April 2012.

But, where income falls significantly from one year to the next, the final entitlement for a year is determined by that year’s taxable income. From 2012/13 onwards, however, the first £2,500 of the fall in income is disregarded.

Example
Martha is a single parent working full-time in her business. Her mother looks after her two children, so she has no eligible childcare costs. She is entitled to Tax Credits of £10,585 for 2012/13 before any withdrawal but, as her profits for the year ended 30th June 2011 were £70,000, she is currently unable to claim any.

In April 2012, Martha realises that her profits for the year ending 30th June 2012 are likely to be significantly less, so she makes a provisional Tax Credit claim for 2012/13. Initially, her claim is based on her 2011/12 income, so she receives nothing. When her income for 2012/13 is finally calculated as £20,000, however, she receives £3,992.

In this example, Martha received her full entitlement because she made a provisional claim in April 2012.

She was, however, effectively treated as if her income for 2012/13 was £22,500, due to the ‘income fall disregard’ of £2,500.

Claims made for 2012/13 onwards can only be backdated by a maximum of one month. Hence, for example, if Martha had made her claim on 5th October 2012, it would have been backdated to 5th September and she would have received just seven twelfths of her entitlement (i.e. covering the period from 5th September 2012 to 5th April 2013), or £2,329.

For more information: Business Tax Planning