As tax advisers, we regularly undertake tax planning to ensure that tax bills are minimised. However, there may not be significant profits upon which to save tax.

In such cases, we work with the clients to maximise their Working Tax Credits and Child Tax Credits entitlement - this being an invaluable source of income in "leaner" years. We regularly work with clients who are on smaller incomes to realise Tax Credits in excess of £10,000 tax-free per year.

Careful planning of capital expenditure can also create opportunities for the self-employed to claim Tax Credits which historically may not have been available. These additional funds can effectively pay for the capital equipment purchased.

We have recently worked with a young couple who have just started a business, enabling them to generate Tax Credits in excess of £20,000 tax-free over a two-year period. This example is expanded upon in case studies.

Some Tax Credit Examples

The names in the following examples have been changed to protect the guilty!!!

Example 1
Bob and Sally were together at 6 April 2010, then they separated on 31 December 2010.  There are potentially three awards, provided that each has been claimed.  The first relates to the couple up to 31 December 2010, the second is for Bob for the period from 1 January 2011 to 5 April 2011, and the third for Sally for the period from 1 January 2011 to 5 April 2011.  This will generate three envelopes requiring three forms to be agreed: the first by Bob and Sally together, then one each by Bob and then Sally respectively.  What will appear confusing in such cases is that the income figure to be filed in on all three forms is the income for the whole 2010/11 tax year.  If Bob’s salary was £18,000 and Sally’s was £15,000 in 2010/11, then the income for their combined form will be £33,000.  On Bob’s own form for the latter part of the year this will be £18,000 and on Sally’s £15,000.  The annualised income is used for all claims.

May 2011

Example 2
Marion’s 2010/11 income for tax credits is £20,000.  In May 2011 she takes maternity leave and her pay is reduced to a level of around £18,000 per annum.  She claims additional tax credits to cover the reduction.  In November 2011 she returns to work at an increased salary of £22,000 per annum.  Thus her income for tax credit purposes in 2011/12 is £19,833.  Any overpayment resulting from the fact that she was paid tax credits appropriate to someone on income of £18,000 for part of the year is not covered by the disregard and may have to be repaid.

May 2011