This blog will answer the following questions:
- What are tax credits?
- What are the different types of tax credits?
- Who can claim?
- What are protective claims?
- How are tax credits calculated?
- What else should I know before applying?
What are Tax Credits?
So, first thing’s first - what are tax credits? Well, they were introduced in 2003, to integrate benefits into the tax system, in place of cash handouts. It basically acts as a financial buffer for those who need extra support. This entitles you to monetary cover if your income drops, and is variable depending on your wage and your familial responsibilities.
As a director, we know that this may not seem like a desirable thing to apply for, but it’s a great safety net for your business.
What are the types of Tax Credits?
There are two types of tax credit:
- Working Tax Credit - Suitable for those working a minimum number of hours on low income. Sum received is determined by your income, including dividends.
- Child Tax Credit - Suitable for individuals and couples with children. Payable to couples with joint income of under £40,000, but this can vary depending on additional elements.
Who can claim?
Freelancers, contractors and yes, directors of limited companies, can claim for tax credits. Applying for tax credits doesn’t necessarily mean you’ll immediately get a cash handout, but it’s a good thing to do as you could be entitled to cover if your income does fall. We recommend using HMRC’s questionnaire to check your eligibality.
What are Protective Claims?
As a director, opting for a protective claim for HMRC tax credits is a good idea. Protective claims allow you to qualify for support if your income drops under £6,420 a year. We get that an income this low isn’t in your plan, but by claiming monthly with HMRC you’re covering yourself if something unexpected does happen.
Picture it like a life-jacket on an aeroplane...you probably won’t need it, but it’s very reassuring to know it’s under your seat!
How are Tax Credits Calculated?
Calculating director tax credits with HMRC is famously complicated, so it’s much better to save time and use their automated calculator. This leaves the tricky stuff to experts who’ll tell you what you may be entitled to.
What else should I know before applying?
So, before you get cracking, there are a couple of things to bear in mind. Firstly, you need to notify HMRC if your circumstances change. We know that it may be tempting to make the most of an over-payment, but you’ll end up having to repay the sum spent, which could cause unnecessary financial strain. Finally, you should always make sure that you’re accurate and honest with your income claims, to avoid trouble with HMRC!
Want to know more?
- A guide to dividends and how they should be used
- Information about pension contributions
- Loan agreements with your company and how to add interest
- An outline of tax-free or low tax benefits
- How loans can be used instead of pay
- Capital gains tax allowance
...and much, much more!
Alternatively, get in touch to transform your tax handling, with Accountancy Cloud today.