Working Tax Credit entitlement rules
The focus for many firms of accountants in delivering advice to clients on tax credits is to concentrate on families with children of school age, as the family element of Child Tax Credit is available in full on household income of up to £50,000 a year. However, you might be surprised to find that many claimants of tax credits do not have children. Working Tax Credit will often be available to single or couple claimants without children in years when profits are very low, or indeed when the client is incurring trading losses.
Working tax credit is available to those who are either employed or self employed and are aged at least 25 (if they have no responsibility for children). They must be working for at least 30 hours per week, unless they have a disability, in which case the qualifying age is 16 and they must also work for 16 hours per week. When a couple make a joint claim, the hours they each work are added together to determine entitlement.
Working tax credit basic entitlement is currently £1,890 per annum, with a further £1,860 available for claims by couples. If the couple work a total of 30 Hours a week between them a further £775 may be claimed, bringing the gross award to £4,525. Further amounts are available to claimants with a disability and to claimants who are over 50 and returning to work after a period on Jobseeker’s Allowance. The taper rules work the same as for child tax credit, so the award reduces by 39p for each pound of income over the taper threshold of £6,420.
So a couple working 30 hours a week between them will receive some award of working tax credit if their income falls below around £18,000. However, as always with tax credits, it is essential to claim early to obtain the benefit of the credits. Where a claim is based on the income of a previous year, it will be updated after the year end when the renewal is filed, as usual subject to disregarding the first £25,000 of any increase in income.
HMRC has just launched a new information page about claiming working tax credit, with a useful calculator for prospective claimants intended to help them identify whether it is worth them claiming or not.
Tax credits and directors – entitlement rules
Directors of small companies claiming tax credits can run into various problems if they have paid themselves a low salary plus dividends. However, one trap for the unwary is the interaction between two unrelated pieces of legislation – tax credit entitlement rules and the National Minimum Wage rules.
In order to benefit from Working Tax Credit, a claimant must be engaged in qualifying remunerative work. Ignoring the self employed, the original definition of employed read “employed….means employed under a contract of service, and includes the holding of an office, the emoluments of which are chargeable to Schedule E…” (Reg 2 The Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002 (SI 2002/2005)). Therefore the definition included those formally employed, and directors as office holders.
However, the Working Tax Credit (Entitlement and Maximum Rate) (Amendment) Regulations 2003 (SI 2003/701) amended this definition with effect from 6 April 2003. Regulation 2 is amended to read “employed….. means employed under a contract of service or apprenticeship where the earnings under the contract are chargeable to income tax as employment income under ..….”.
The removal of the term “and includes the holding of an office” means that directors do not qualify as office holders alone, and thus would need to be employed under a contract of service in order to qualify. Many directors do not choose to enter into a contact of employment with their companies, as this permits some flexibility over their pay.
When the National Minimum Wage legislation came into force, there was concern about the implications for directors of small companies who were drawing a minimal salary. The professional bodies sought, and obtained reassurance for directors of small companies from the then Inland Revenue (as enforcement body) as follows. If a director draws a salary from a company in return for his services, even in cases where he is the sole worker in a company, it is not necessary for him to pay himself minimum wage unless the director is also an employee of the company.
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Under normal circumstances directors would not be regarded as de facto employees unless the individual director has sought to obtain the benefits that employment law could provide for him, by entering into a specific contract of employment with his company. Thus it is only necessary for a director to draw minimum wage when he has taken the step of entering into a contract of employment. Otherwise, any payment for services would be made to him as office holder, rather than a worker, and there is no minimum rate of pay.
So the interaction of these two pieces of legislation is quite clear. In order to claim Working Tax Credit the director of a small company should enter into a formal contract of employment with his company, and therefore should draw National Minimum Wage for the hours worked. Otherwise a claim to WTC will fail, unless the claimant’s partner is working for the necessary number of hours per week. Note that the NIC cost of drawing minimum wage as salary as opposed to the Earnings Threshold (with no NIC cost) is around £800 after allowing for the corporation tax relief on the extra salary and employer’s NIC. This cost may well erode any benefit in claiming WTC.
It is not at all clear that this was the intention of the amendments to the Entitlement Regulations in 2003, which were really intended to change all references to ICTA to align them with the new terminology and statutory references in ITEPA 2003. However, when advising clients without children to claim WTC it would be sensible to bear this rule in mind.
Rebecca trained in London with Kidsons and, on qualifying, spent some time as Chief Accountant of a manufacturing company. She now has her own small practice in Gloucestershire that comprises of owner managed businesses and small companies.
She also lectures extensively for a range of professional bodies, accountancy firms,...