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| Article Listing | Search Articles | More Articles in Tax and accountancy | More Articles by Alexander Probin |
Tax Credits and the self employed |
| by Alexander Probin - 01/10/2007 |
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| "Alexander Probin provide some useful guidelines about tax credits and the self employed." |
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The amount that you can claim from the Tax Credits system is basically limited by your net taxable income. If you are employed this will largely be the amount of your salary or wages.
If you are self employed your income for tax purposes, and therefore the amount on which your tax credit is based, is dependent on two factors.
1. Your trading profits adjusted for expenses that do not attract tax relief, less
2. Tax relievable deductions - for instance pension contributions and claims for capital allowances.
(Capital allowances are a percentage deduction which you can make when you buy an asset to use in your business, such as a vehicle, computer etc)
It follows therefore that even if your trading profits are fairly stable year on year, if you invest in a significant pension contribution or purchase an asset which qualifies for a capital allowance deduction, you will be reducing your overall income for tax purposes. Consequently you may be able to increase your claim for Tax Credits!
Income disregard
Tax Credit claims are based initially on your income for the previous tax year. When your income for the current tax year is known the claim is recalculated. If your income has increased you may have to repay Tax Credit, if your income has fallen you may be able to increase your claim.
If your income has increased your Tax Credit claim will NOT be adjusted if the difference or increase in your taxable earnings does not exceed £25,000. (This £25,000 is referred to in the tax legislation as the "Income disregard".) If it does exceed £25,000 only the excess is taken into account.
This fairly generous £25,000 allowance means that if you make a pension contribution or can claim a significant capital allowance in Year 1, this may also impact your Tax Credit claim in Year 2, as long as the overall increase in year 2 is less than £25,000.
For example if your taxable profit in Year 1 was £24,000, and you made a £1,000 pension contribution, you may qualify for an additional tax credit payment of £370. If you made no pension contribution in Year 2 but your taxable profit was still £24,000, you would still receive the increased tax credit payment in Year 2 based on net income of £23,000, as the effective increase in your taxable earnings (profits less pension contributions) is £1,000 and therefore below the £25,000 income disregard.
So making a pension contribution or buying a trading asset may have two effects.
1. Decrease your tax payments in the year you make the payments, and
2. Increase the amount of Tax Credit that you can claim, and possibly for 2 years!
As always personal and family circumstances will affect your potential claim but the rewards for appropriate planning may be significant. Contact us for clarification.
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| Contact Email: info@alexanderprobin.com |
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