1. Summary of Key Points
- Notify your tax office as soon as it is clear that your income for this tax year will be lower than for last tax year.
- Lower taxable profits will often result in a higher tax credit award.
- This higher award could potentially carry on into the next tax year also, unless your profits increase by £25,000.
- The reduction could be caused by a drop in business or an investment in equipment by the business.
2. Background
The Working Tax Credit (WTC) is means tested. This means that for people with incomes which vary from year to year, their WTC entitlement can also vary a lot. Self-employed people in business are the main group most likely to be affected by this – but this note could equally well apply to anyone whose taxable income has changed a lot from one tax year to the next.
Note that Child Tax Credit will not be dealt with by this note. This is paid to the person caring for the children in a household and is not means tested, so variations in taxable income make no difference to this benefit.
3. Who is entitled to WTC?
For the 2008-2009 tax year:
- Anyone who has a child and whose household income is below £58,175.
- Anyone who has a child under one and whose household income is below £66,350.
- Anyone who is in work with a household income below £58,175.
4. How is it worked out?
There are various separate elements for those people in work:
- Basic – for everyone in work.
- Second Adult & Lone Parent – for single parents or couples.
- 30 hours – paid to households whose combined working hours are at least 30 hours per week.
- Disability – paid to registered disabled people.
- Severe Disability – severely disabled people.
- 50+ return to work – for people over 50 returning to work after a spell on benefits.
- Childcare – for people who pay childminders whilst they are at work.
5. What about when my income varies?
The rules are as follows:
- If your current tax year’s taxable income is less than last year’s, the current year level will be used.
- If this year’s taxable income is higher than last year’s by £25,000 then this year’s less £25,000 will be used.
- In all other cases the current year’s taxable income is used.
6. Notifying Changes
The golden rule here is to notify HMRC – by phone or letter – as soon as it’s clear things are changing. Changes which result in higher awards will only be backdated for three months. But changes which result in lower awards will be backdated to the point at which the change first took effect.
The phone number is 0845 300 3900 with all the usual silly menu systems and listening to rubbish music before you get to speak to anyone. Or write to:
Change of Circumstances, Tax Credit Office, Preston PR1 0SB
7. A Worked Example
Bob is a self-employed hairdresser aged 40 with no disabilities with two children aged 8 and 6 whose taxable family income for 2008-2009 was £45,000. However, he decides his premises need a facelift so in 2009-2010 he spends £35,000 on fixtures, fittings and other equipment for his business. His accountant advises him that all of this £35,000 can be claimed against tax and his taxable family income for 2009-2010 then drops to £10,000. In 2010-2011 it is back to business as usual for Bob, but he carries on with some investment in equipment and so his taxable family income rises to £34,000.
For 2008-09, Bob’s family is entitled to 4 elements of tax credit – child basic 545, 2,085 per child, 1800 WTC basic, 1,770 WTC 2nd parent and 735 for 30 hours per week giving 9,020 in total. The excess income over 6,420 is 45,000-6,420 = 38,580 so a 39% reduction is applied to the award – 3,518 – which makes the award 5,502 or £105.81 per week.
In 2009-2010, 4 elements again – CTC basic 545, 2,235 per child, WTC basic 1,890, WTC second parent 1,860, WTC 30hrs 775. This is now a maximum award of 9,540. But now the excess income is just 10,000 less 6,420 = 3,580. The 39% restriction is now 1,396 so the award is 8,144 or £156.61 per week.
For 2010-2011 we’ll assume all the rates stay the same. The maximum is still 9,540. The taxable income for the calculation is 10,000 once more as taxable income has only risen by 24,000. The excess income is 10,000 less 6,420 = 3,580. The award remains at 8,144 for the year.
In this case, by making a claim early enough Bob will receive more than £5,500 in 09-10 and 10-11 than if he had not notified his tax office about the change.