What are Tax Credits and how can they help my business?
The UK system of tax credits can be complicated but if you have your own limited company, claiming working tax credit and/or child tax credit can help you through financial uncertainty if your business suddenly declines.
The tax credit system is based on individual circumstances, and eligibility depends on various factors including the number of hours you work each week, your pay, and your own situation.
If you’re already claiming one or both types of tax credit you may have been notified that you’re being transferred to Universal Credit, and this is taking place between 2019 and 2022 for the majority of people already in receipt of tax credits. Universal Credit incorporates various state benefits into one payment.
Making a protective claim for tax credits
Businesses can decline very quickly and even if sales are strong it won’t take long for your income to drop if a key customer leaves, for example, or sales suddenly decline for reasons beyond your control.
As a company director you need to make sure you don’t take a salary that the business can’t support, as if you do, you can face allegations of misconduct if the business later fails and has to be liquidated.
This is why making a pre-emptive claim for working tax credit and child tax credit, if applicable, can be a financial lifesaver. So what is a protective claim for tax credits, and how could it help you and your business?
What is a protective claim?
A protective claim for tax credits essentially means you’re ‘in the system’ if your income drops below a certain level. HMRC will input your information, and even if your income is too high at the time of application, if it does drop in the future you’ll be able to claim the money faster as they’ll have processed/verified your details.
Essentially, making a protective claim each year means you’re always covered if the need arises. So could you qualify for tax credits?
Working tax credit
You must be regarded as an employee to be eligible for working tax credit, so you’ll need to have a contract of employment with your limited company. By doing this you’ll have to consider National Minimum Wage legislation, which could affect the ratio of salary/dividends you currently take as a director.
Eligibility is based around:
- The number of hours you work
- Your income
- Your individual circumstances – whether you have a partner, for example, your age, or if you have a disability
Child tax credit
Child tax credit may be payable if you have one or more children under the age of 16, or under 20 if they’re still in education/training. The amount you receive depends on various factors including your income (joint income if you’re part of a couple) and how many children you have.
It’s a good idea to seek expert accountancy help to find out how tax credits could help your particular business, and whether you would qualify. Handpicked Accountants can provide you with a shortlist of recommended accountants in your area, based on our longstanding knowledge of their qualifications and expertise. Please contact one of the team to find out more.