Hornbeam Accountancy Services Ltd


Hornbeam Highlights 37

Tax Credits

Whilst the government strives to close the budget deficit by raising taxes, and we citizens strain every nerve to reduce our taxes, the opportunities provided by tax credits often go underappreciated.

We have been exploring ways in which tax credits can help clients that have been hit by the recession. I have been surprised by the wide range of people who might benefit from tax credits

  • A family who have lost one wage as a result of redundancy
  • An employee whose wage has been cut by loss of overtime or part time working
  • An employer who is looking for ways to cut labour costs.

In short whatever you think about the ethics of Tax Credits, everyone should try to understand the economics…

The key point here is that workers with incomes between £6,000 and £46,000 who are entitled to tax credits will lose only 30p of net income for every £1 their income falls.

Consider John; a married man with no children and a wife in full time education. Earning £15,000 per year he receives £12,274 of net pay and is entitled to £1,179 of working tax credit, £13,453 in total. But he wants to renovate a bungalow that he has just inherited, so he considers opting to work 3 days per week. He agrees with his boss to cut his salary to £9,000 (3/5 of £15,000 = 60%). His net pay falls to £8,134, but his tax credits rise to £2743, or £10,877 in total. So a £6,000 fall in gross pay has resulted in just an £2,576 reduction in take home pay. He figures he can create much more than £2,576 of value working on the inherited property.

How does this work? For every £ less that John earns he pays 20p less tax and 11p less National Insurance, but he also receives 39p more tax credits. So for every £ less earnings he is just 30p worse off. However when Johns hours fall below 30 per week he loses entitlement to a £775 credit for working more than 30 hours per week. So John may ask us to work out what his take home would be if he reduced his hours by one day a week, instead of two.

And, of course, if John hadn’t been claiming working tax credit in the first place his net income falls just £1,397, from £12,274 to £10,877!

Now consider Steve, John’s boss. Steve’s business has declined in the recession, but Steve is reluctant to make redundancies (redundancies cost money, key skills may be lost, and staff in small businesses are often friends and relatives) By finding two or three employees to go part time Steve; avoids costs of redundancy, holds on to employees with key skills, and avoids hurting long term friends. But for each employee like John the company probably saves £6,000 in salary, £768 in employers NI, and numerous on costs. There is considerable evidence that employee productivity is inversely proportional to hours worked, so it is highly unlikely that output from John will fall by as much as 2/5.

Tax credits might be a fantastic tool for cutting staff costs in the face of recession.

Now consider Steve’s sister Joy. A single mother of two children, one under 1, she pays £100 per week childcare and is the sole breadwinner in her household. At £30,000 salary Joy earns £22,624 net and receives £5,049 tax credits, making her total take home £27,673. But Joy hates her job and wants to know what happens if she cuts down to 4 days per week. She is considering either using that day to spend more time with her kids (saving childcare) or to do a further education course. She will lose £6,000 of salary. So her net salary will be £18,484. If she uses the free day to return to education her Tax credits will rise to £7389, leaving her with a total take home of £25,873 (which is of course an £1,800 cut for a £6,000 salary reduction).
If however she reduces her childcare to £80 per week her tax credits will fall to £6,557 and her total take-home to £25,041 (reduced by 80% of the £1,040 saving in childcare)

What we hope you have got from this is that Tax Credits can massively cushion losses of income as a result of the recession.

We offer the following services.*

If you are not already claiming tax credits

1. Review your situation to see if you are entitled to tax credits

£100
2. Submit a claim for tax credits on your behalf

£120
3. Review your situation to calculate the effect of any changes on your net take-home – cost per change

£42
4. Alternatively, the whole service for

£100 plus 10% of the first 
year tax credit claimed

If you are already claiming tax credits
 
5. Review your situation to see if you are getting the right tax credits

£84
6. Review your situation to calculate the effect of any changes on your net take-home – cost per change

£42
7. Fill in a tax credit form for you (if we do the tax return)

£60
8. Fill in the tax credit form for you (if we don’t do your tax return)

£100

If you are an employer

9. We would be delighted to offer this service to your staff, tailored to your specific requirements, at our normal charge out rate or at a discounted scale charge.

*All our services are offered at normal charge out rates as an alternative to fixed or % scale charges

Disclaimer
Most of the information contained in this Hornbeam Highlights is of necessity greatly oversimplified. We are trying to bring to your attention tax planning and business management opportunities. However, you should not take action based upon this leaflet without obtaining specific professional advice.

Whether you are a client or not, if we can provide further help or advice concerning any of the matters covered here, please do not hesitate to contact us.


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