Optimise Accountants -

Claiming Tax Credits And Benefits – Part 3: Tax Credits Examples

June 18, 2014

Posted by Simon Misiewicz on 18th June 2014

Are you worried about money as a property investor?

Would you like to claim tax credits and benefits to boost your income?

The Diagnosis

Tax and money issues need to be diagnosed in order to be understood for a remedy to be implemented.

There may come a time when one member of the household decides it best that they become a full time investor. There are a few factors that need to be worked out before that can happen. One of the major considerations is how much money can you survive on until property generates enough income to sustain the family financial needs.

We have written several articles to enable you to make more money as a property investor:

Part 1: Child tax credits
Part 2: Working tax credits
Part 3: Tax credits examples
Part 4: Maternity pay and child benefit

Part 3: Working tax credit examples

Tax credits Example 1

Patricia Taylor is a single parent with 1 child aged 12 and she works less than 30 hours a week. Patricia’s gross earnings last tax year were £8,000 (rising to £8,400 in the current year) and apart from Child Benefit (which is disregarded for tax credits purposes) she has no other income. She does not use registered or approved childcare.

Patricia’s maximum tax credits entitlement will be a combination of:

  • Child Tax Credit – family element (£545) and child element (£2,750), giving £3,295 a year (£545 + £2750)
  • Working Tax Credit – basic element (£1,940) and lone parent’s element (£1,990), giving £3,930 a year. (£1940 + £1990)
  • A total of £7,225 (£3295 + £3930)

As her income in the current year is expected to rise by less than £5,000, her tax credits award for the year will be based on last year’s income. The income threshold is £6,420. Patricia’s award is worked out as follows:

  • Annual income £8,000.00
  • Less threshold –£6,420.00
  • Excess income £1,580.00 (£8000 – £6420)
  • Her Maximum tax credits (as shown above) is £7,225.00
  • Less 41% of excess income (£1580 – 41%) is £647.80
  • Award is £6,577.20 (£7225 – £647.80), which is £126.49 a week.

Tax credits example 2

Rebecca Dobson is a single parent with 1 child aged 4. Rebecca works more than 30 hours a week. She uses a registered childminder, which costs her £100 a week. Her gross earnings for the last tax year were £15,000 (this will rise to £15,750 in the current year). She gets maintenance from the child’s father at a total of £1,200 each year. She also has £5,000 in her building society account which in the previous tax year paid gross interest (that is, before tax) of £150 and she expects the same amount this year. Her total gross income last tax year was therefore £16,350 (not including Child Benefit, which is disregarded). For the purposes of tax credits we also disregard:

  •  the maintenance payments
  • the gross interest, because it is below the £300 limit for reporting in the tax credits claim form

Therefore, her income for tax credits purposes is only her earnings of £15,000 last year and £15,750 for this year.

Rebecca’s maximum tax credits entitlement will be a combination of:

  • Child Tax Credit – family element (£545) and a child element (£2,750), giving £3,295 (£545 + £2750)
  • Working Tax Credit – basic element (£1,940), a lone parent element (£1,990), giving £3930 (£1940 + £1990)
  • a 30-hour element, which is £800 per year (For working 30 hours or more)
  • and 70% of the eligible childcare costs of £100 a week (70% of £5200 per year ) giving £3640 total.
  • This is a total of £11,665. (£3295 Child Tax Credit + £3930 Working Tax Credit + £800 + £3640)

As her income in the current year is expected to rise by less than £5,000, her tax credits award for the year will be based on last year’s income. The income threshold is £6,420.

Rebecca’s award is worked out as follows:

  • Annual income £15,000.00
  • Less threshold –£6,420.00
  • Excess income £8,580.00 (£15,000 – £6420)
  • Her Maximum tax credits award is £11,665.00 (as shown above)
  • Less 41% of excess income (41% of £8580) £3,517.80
  • Award is £8,147.20 (£11,665 – £3517.80), which is £156.68 a week.

Tax credits Example 3

Jenny and Mike Smith have 1 child aged 5. Mike works 16 hours a week while Jenny works 8 hours a week. Mike had gross earnings last tax year of £15,000. Jenny’s gross earnings were £5,000 and apart from Child Benefit (which is disregarded for tax credits purposes) they have no other income. They do not use registered or approved childcare.

Mike and Jenny’s maximum tax credits entitlement will be a combination of:

  • Child Tax Credit – family element (£545) and a child element (£2,750), giving £3,295 (£545 + £2750)
  • Working Tax Credit – basic element (£1,940) and couple element (£1,990) giving £3,930 (£1940 + £1990)
  • A total of £7,225. (£3930 + £3295)

As Mike and Jenny’s income in the current year is expected to rise by less than £5,000, their tax credits award for the year will be based on last year’s income. The income threshold is £6,420. Mike and Jenny’s award is worked out as follows:

  • Annual income £20,000.00
  • Less threshold –£6,420.00
  • Excess income £13,580.00 (£20,000 – £6420)
  • Maximum tax credits £7,225.00 (child tax credit of and working tax credit as shown above)
  • Less 41% of excess income £5,567.80 (41% of £13,580)
  • Award £1,657.20 (£7225 – £5567.80) which is £31.87 a week

However, if Mike’s hours dropped to below 16 hours a week, Mike and Jenny would not be entitled to Working Tax Credit because as a couple with children they have to work 24 hours a week between them with at least one of them working 16 hours a week.

You can calculate the amount of tax credits that you can claim by going to the below URL:
https://www.gov.uk/tax-credits-calculator

If you are looking for an accountant or thinking of changing your current accountant because they do not understand property investing and tax implications then please Click Here To Book an “Initial Free Consultation”.

Download our FREE Property Investors Guide, Call Us on 0115 946 1991, To Email Click Here, Follow Us on Facebook or Tweet Simon Here

Please ensure that you check out our latest webinars and courses Property Accounting & Investment Webinars

References:

1. A Guide To Child Tax Credit and Working Tax Credit
2. Working Tax Credit – Help with the Costs of Childcare
3. Child Tax Credit and Working Tax Credit – An Introduction
4. Child Tax Credit – An Overview



Get your FREE ebook "Property Investors Guide"
Enter your information to recieve the eBook

First Name:*
Last Name:*
Lead Source:*
Email:*
Phone:*

Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk