Tax Credits And The New Annual Investment Allowance
As we approach 31 July thoughts turn to tax credits as this is the deadline for providing income figures to the Revenue for the 2007/08 claim.
In the budget it was announced that tax credits withdrawal rate would be increased to 39%. So for each addition of £1 income received you will lose 39p in tax credits. When this is taken into account alongside the basic rate of tax at 20% and National Insurance at 8% this means that the overall effective rate of tax that can be saved by careful planning is as much as 67%.
Consider into the calculations that an increase in income from one year to the next of £25,000 is ignored for tax credits purposes and the rate at which “tax” can be saved increases to 106%.
I show with an example below how this can affect day-to-day business decisions when considered alongside the new rules for capital allowances.
How Would You Like The Government To Pay For Your Next Van?
A new regime for capital allowances has begun from April this year. In certain circumstances this could mean that the Revenue could pay you to buy some new equipment.
The new rules allow businesses to claim the full cost of most new capital assets against their profits for tax purposes. The maximum a business can spend on capital assets and get full relief is limited to £50,000 for periods starting after 5 April 2008 (1 April 2008 for companies). This relief is known as the Annual Investment Allowance (AIA).
If you run your business through a sole trade or partnership and receive tax credits the new rules are likely to be of great benefit to you.
Example
A business with a year end of 5 April 2009 buys a new van for £20,000.
This is less than the maximum allowed under the AIA so the full cost of the van is deducted from the business profits.
| Tax relief is given at |
20% |
|
£4,000 |
| National Insurance relief is given at |
8% |
|
£1,600 |
| Tax credits are increased in 08/09 by |
39% |
|
£7,800 |
| Tax credits are increased in 09/10 by * |
39% |
|
£7,800 |
| |
|
|
|
| Total reduction in tax and increase in tax credits |
106% |
|
£21,200 |
| |
|
|
|
| Net refund |
6% |
|
£1,200 |
Plus one free van.
* Available because an increase in income of up to £25,000 is ignored for tax credits purposes.
This does not take into account the additional savings that can be made because any loan taken out for the purchase is likely to be quickly repaid from the savings above reducing the interest cost.
A Word Of Warning
You will need to save extra for the tax bill due on 31 January 2011 because the payments on account towards the 2009/10 tax bill, which are based on your 2008/09 income, will have been low as a result of the claim for the van.
You will need to advise the tax credits office of your estimated earnings for 2010/11 before April 2010 so that you do not receive too many tax credits. It may be best to provide an over estimate of this amount and then receive an additional lump sum if it proves to be too high rather than having an amount to repay if the estimate proves to be too low.
Example To Show Tax Credits Position
A family where both partners work at least 30 hours (and only one working more than 30 hours (2)), with three children one of which is under a year old:
Annual income
£
|
|
Amount received if weekly childcar costs are £125
£ |
|
Amount received of there are no childcare costs
£
|
|
Amount received if there are no childcare costs (2)
£ |
£7,500 |
|
£16,558 |
|
£11,263 |
|
£11,263 |
£27,500 |
|
£8,616 |
|
£3,363 |
|
£3,321 |
The additional amount received in each case when income drops by £20,000 is over £7,800.
These figures have been calculated using the Revenue’s online tax credits calculator which can be found at:
http://www.taxcredits.inlandrevenue.gov.uk/Qualify/DIQHousehold.aspx.
Your personal result will depend on your level of income in a year, how many children you have and their age and whether or not you pay for childcare.
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