Tax Credits

Working Tax Credits

Directors of small companies claiming tax credits can run into problems if they have paid themselves a low salary topped up with dividends due to the interaction between the tax credit rules and the National Minimum Wage (NMW) rules.

In order to benefit from the basic element (and therefore other elements) of  Working Tax Credit a claimant must be engaged in qualifying remunerative work.

The wording of the Working Tax Credit rules means that a director must be employed under a contract of service in order to qualify. Many directors choose not to enter into a contract of employment with their company as it permits some flexibility over pay. It is only necessary for a director to draw the NMW where he has entered into a contract of employment. Otherwise any payment for services would be made to him as an office holder rather than a worker and there is no minimum rate of pay for an officer of the company.

The interaction between the two pieces of legislation means that in order to claim Working Tax Credit (including the childcare element) the director of a small company should enter into a formal contract of employment with his company and therefore should draw NMW for the hours worked. Otherwise a claim to Working Tax Credit may fail, unless the claimant’s partner is working for the necessary number of hours per week. Claimants of Child Tax Credit are unaffected as there is no necessity for the claimant to be working in order to claim. If you are concerned as to how this impacts on you, please contact us to review your specific situation.

May 2009