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Working Tax Credits for the Self Employed 2012-13

Introduction

Many self employed people assume they are not entitled to tax credits as they have no children living with them. This is not the case as tax credits are divided into two types, Child Tax Credits and Working Tax Credits. If you don’t have Children living with you but have a low income (more about this later) then you can claim Working Tax Credits.

Claims and eligibility depend on whether you are making a joint claim (you are married or live with someone else) or you are single.

Single Applicants

Single Applicants working more than 30 hours per week are entitled to working tax credit of £2,710 per annum if they earn less then £6,420 per annum. This can only happen if you’re self-employed as otherwise it’s less than the minimum wage!!

For income over £6,420, the benefit is withdrawn at 41%

For example

Income £7,000 – tax credits £2,472.20

Income £8,000 – tax credits £2,062.20

Income £9,000 – tax credits £1,652.20

Income £10,000 – tax credits £1,242.20

Income £11,000 – tax credits £832.20

Income £12,000 – tax credits £422.20

Income £13,000 – tax credits £12.20

Tax credits will still be paid on income up to £13,030, at this point the 41% claw back has clawed back the whole £2,710 benefit. So, if you’re single, earning less than £13,030 and working more than 30 hours per week then you should make a claim.

 

Joint Applicants

Joint Applicants working more than 30 hours per week between them are entitled to working tax credit of £4,660 per annum if they earn less then £6,420 per annum. Again. this can only happen if you’re self-employed as otherwise it’s less than the minimum wage!!

For income over £6,420, the benefit is withdrawn at 41%

For example

Income £7,000 – tax credits £4,422.20

Income £8,000 – tax credits £4,012.20

Income £9,000 – tax credits £3,602.20

Income £10,000 – tax credits £3,192.20

Income £11,000 – tax credits £2,782.20

Income £12,000 – tax credits £2,372.20

Income £13,000 – tax credits £1,962.20

Income £14,000 – tax credits £1,552.20

Income £15,000 – tax credits £1,142.20

Income £16,000 – tax credits £732.20

Income £17,000 – tax credits £322.20

Tax credits will still be paid on income up to £17,785, at this point the 41% claw back has clawed back the whole £4,660 benefit. So, if you’re a couple, earning less than £17,785 in total and working more than 30 hours per week then you should make a claim.

 

For all Tax Credit claimants, on any income earned over £6,420 this means that, as well as paying tax at 20% and National Insurance at 9%, you lose 41% tax credits – an effective overall tax rate of 70%.

So for every £100 earned over £6,420, after tax , NI and tax credits are taken into account, you will only be £30 better off overall!

I haven’t mentioned claims for people working less than 30 hours per week or disabled workers or people 50 years + returning to work. Information about these can be found in the links below.

There’s a lot of information on the internet published by HMRC – the main links are

How to claim tax credits

http://www.hmrc.gov.uk/taxcredits/start/claiming/get-started/how-to-claim.htm

A guide to tax credits

http://www.hmrc.gov.uk/leaflets/wtc2.pdf

Chris Root

AAA Tax & Accounting Services Ltd

NB rates quoted are all relating to the tax year 2012-13