Child & Working Tax Credits

By April 2014 the system of Child and Working Tax Credits is expected to be replaced by a new benefit called Universal Credit. Prior to this change there will be significant cuts in the benefits paid to many tax credit claimants, phased in over a three year period. Rates will be frozen or cut in 2011/12 and the summary below provides a comparison of the rates compared to 2010/11.

Child Tax Credit

Family element: no change at £545
Baby element: decrease from £545 to nil
First income threshold: decrease from £16,190 to £15,860
Second income threshold: decrease from £50,000 to £40,000

Working Tax Credit

Childcare element:
Maximum costs for one child: no change at £175 per week
Maximum cost for all children: no change at £300 per week
Percentage of costs covered: decrease from 80% to 70%
First income threshold: no change at £6,420
First withdrawal rate: increase from 39% to 41%
Income disregard: decrease from £25,000 to £10,000

The income disregard provides a buffer for changes in income, so overpayments of tax credits do not arise where income varies within this threshold year on year. The reduction in this threshold is likely to adversely affect families with fluctuating incomes, such as the self-employed. In the future, in order to avoid a claw-back of tax credits, the claimant will need to finalise their self-employed profit figures as close to the tax year end as possible.

PAYE TAX CODES

HM Revenue and Customs (HMRC) are issuing PAYE tax codes for 2011/12 and between January and March 2011 and these will be used against employees pay from April 2011 onwards. It is important that these coding notices are checked carefully and HMRC have provided the following link to help individuals to check their codes.

http://www.hmrc.gov.uk/incometax/tax-codes.htm

However if you are unsure that your coding notice is correct and would like some further guidance please feel free to contact us.

On the plus side

The majority of taxpayers will see an increase in their tax code as the personal allowance for those under 65 increases from £6,475 to £7,475.

If you have simple tax affairs (just one employer with no reliefs or benefits or tax underpayments brought forward) it is unlikely that you will receive a coding notice. The current coding of 647L will be automatically uplifted to 747L following general instructions to employers.

Although the personal allowance is increasing the point at which taxpayers start to pay the higher rate of 40% tax on their taxable income is decreasing (from £37,400 to £35,000), removing the benefit of the personal allowance increase for some taxpayers.

The personal allowance for those with adjusted net income over £100,000 will be introduced in 2010/11 and will continue for 2011/12. The reduction in the allowance is by £1 for every £2 of adjusted net income above the income limit. Adjusted net income for these purposes is broadly all income after adjustment for pension payments, charitable giving and relief for losses. Individuals with adjusted net income of at least £114,950 will not be entitled to a personal allowance for 2011/12.

If you need any help or advice with any issues raised or any other accounts or tax related matter please feel free to contact us on 01449 798444 or email info@targetaccounts.co.uk.

Greg Coomber – Target Accountants