Child and Working Tax Credits and sudden increase in investment income - does this trigger a claw back?

Child and Working Tax Credits and sudden...

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If a client couple with one child have had low earned income for two tax years and received tax credits (and continue to receive them), then have a largish dividend in September 2014 and ongoing, will this trigger a claw back of Working and Child Tax Credits received since 6th April?

The situation is a small limited company with very little work for a couple of year, but now suddenly making significant income, so the shareholders can start drawing significant dividends.

They will inform the Tax Credit Office when this starts, but are uncertain whether it will result in a claw back of Tax Credits already received in the current tax year.

Thanks

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By dropoutguy
23rd Aug 2014 01:13

It could do


The dividends and the associated one nineth tax credit
will count as income for tax purposes.

The first £300 of investment income is exempt.

If the total combined income for credits purposes in the current year is more than £5,000 over and above the income of 2013/14, then there will be a clawback. 

 

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By stephenkendrew
22nd Aug 2014 17:35

It depends on the amounts.....

...but there probably will be some clawback because the tax credits are calculated based on income for the whole tax year.

At the moment the tax credits for 2014/15 will be based on their total income for the year ended 5 April 2014.

This will be recalculated when their income for the year ending 5 April 2015 is known. If this exceeds their income for the previous year by more than £5,000, there will be some clawback.

The clawback will effectively be 41% of income above the £5,000 increase (or strictly speaking £5,300 if they had no investment income at all last year since the first £300 of 'other income' is ignored).

They may want to consider reducing the dividends in this tax year to prevent/minimise any clawback. This may still be preferable even if the dividends take them into higher rate tax next year since the extra tax @20% will be preferable to losing tax credits @40%. 

You will really need to do the sums to be able to advise them properly.

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By Minnie136
23rd Aug 2014 07:37

No stephenkendrew - Anti-avoidance

Broadly any changes should be notified within 30 days and yes there could be a claw back from 6 April.

You should pay down DLAs first. 

There is anti-avoidance legislation to prevent profits rolling up in the company which are then not distributed and declared for WTC purposes, this is Notional Income. I do not know if it is ever enforced but it is to prevent Directors from doing exactly what Stephekendrew suggests.

It is basically benefit fraud - retaining the dividends in the company to claim benefits.

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