Many of you may be wondering how the latest changes to the Tax Credit system will affect you. Gary from our Omagh office outlines the key points:
April 6th is the start of the new Tax Year and for many self-employed this will coincide with the start of a new accounting year. Whilst there have been some minor tweaking of the Working Families Tax Credit entitlement elements, the major changes are as follows:
- Reduction in percentage of eligible child care costs covered from 80% to 70%, (i.e. only 70% of childcare costs repaid via tax credits).
- Withdrawal of baby addition element of £545, paid in year of birth.
- Reduction of 2nd income threshold from £50k to £40k.
- Increase in first withdrawal rate from 39% to 41%. (i.e. reduction of Tax Credit entitlement by 41p for every £ of income over £6,420).
- Reduction in income disregard from £25,000 to £10,000.
Depending on a family’s individual circumstances this may or may not have a significant effect on Tax Credits awarded after 6th April. However, beware the change in income disregard as listed at 5 above, as it has the potential to create a substantial overpayment of Tax Credits. This arises as current Tax Credit entitlements are paid on estimated income figures. For the self-employed the best estimate is usually the last years accounts prepared. Going into the 2011/12 tax year it is possible that tax credits are being paid based on income figures for 2009/10 (which could be nearly 2 years ago). If your actual income for 2011/12 is more than £10,000 greater than estimated income, then the Tax Credits office will recalculate your Tax Credit entitlement based on actual income and demand repayment of the difference. To avoid this you need to ensure that your accounts are completed as soon after your year end as possible and the updated figures sent to Tax Credits.