When limited liability companies produce a profit, they can pay rewards in the form of dividends to their owners and shareholders, usually on a quarterly or annual basis. Dividends are calculated based on earnings, which are the funds left over after all expenses have been paid, rather than revenue. Especially, business entrepreneurs must have a thoroughly critical approach to dividend distributions in order to maximise possible tax benefits. Bloom Financials offers skilled and comprehensive dividend guidance and assists businesses of all sizes in realising the benefits of dividend tax rates and allowances.
You must review the following before paying a dividend:
any funds received in advance (unearned revenue)
Responsibilities in terms of taxes (such as Corporation Tax, VAT, and PAYE)
Any outstanding debts from suppliers or other sources must be paid
contract terms of obtained borrowings and investments
Terms on sponsorship or rewards recipients are subject to restrictions
Future trade prospects
It’s also worth considering the articles of association to see if the company’s constitution contains any limitations on dividend distribution.
Dividends are a tax-efficient way for a limited company to get money. However, before you give yourselves dividends, there are a few things you should know about dividend tax:
Dividends could be awarded when a limited company achieves a profit after deducting all allowable expenses, including corporation tax. As per HMRC, dividend tax refers to the rates at which those dividends are taxed. These tax rates may vary from year to year. Dividends are not taxed by the corporation. However, the shareholders to whom you pay the dividend may be required to do so. Dividend tax rates are a crucial determinant of how much tax you pay on your income if you pay yourself in dividends rather than salary as a director.
If you’re unsure about the best approach to pay yourself, you should seek expert guidance from an accountant.
Regardless of their tax band, all taxpayers are eligible for the dividend allowance. Furthermore, irrespective of the tax category in which the beneficiary falls, the amount of dividend allowed is the same. If the allowance isn’t used otherwise, it can extract profits from a family business in a tax-efficient manner.
Dividends are eligible for a number of tax benefits. For instance, any dividend income that comes under your personal allowance, the amount of money you can earn every year without paying taxes, is tax-free. Dividends from individual savings accounts (ISA) are also exempt from taxation. Private limited company shares cannot be placed in an ISA because ISA shares must be traded on an authorized exchange.
Individuals also receive a dividend allowance each year in addition to these tax reliefs. A dividend tax credit existed prior to 2016, with the goal of reducing double taxation for persons who received income from dividends. This has been superseded by the dividend allowance, which achieves the same goal but in a different way.
A £2,000 dividend allowance is available for the tax years 2021/22 and 2020/21. This implies you only have to pay tax on dividends that are greater than that amount.
For the 2017/2018 tax year, the dividend tax allowed was $5,000. The tax allowance was decreased to £2,000 as a result of changes that took effect in April 2018.
The current dividend tax rate is determined by combining your tax band with a dividend allowance. Understanding income tax bands is necessary for calculating how much to pay in dividends. Dividends must be included in your income for determining your tax band.
The dividend tax rates in the UK (2020/21) are based on income tax bands and are as follows:
Income Tax Band
Dividend tax rate
Income tax rate
Basic rate
7.5%
20%
Higher rate
32.5%
40%
Additional rate
38.1%
45%
You must first know about income tax rates in order to determine which dividend tax rate applies to you.
In general, the rate and amount of income tax you pay are determined by the amount of income you earn in a particular tax year.
The following are the income tax rates for the fiscal year 2020/21:
If you earn less than £12,500, you are entitled to the personal allowance and will not be taxed.
The basic-rate tax bracket is 20% of income between £12,500 and £50,000.
The higher-rate tax bracket 40% applies to income between £50,000 and £150,000.
The additional rate tax level of 45 per cent applies to income exceeding £150,000.
Dividends are distributed to individuals or other businesses from post-tax profits, and profits are currently taxed at 21 per cent (2021/22) before dividends are paid.
The amount of dividend income you get throughout the tax year determines how you will pay dividend tax. You don’t have to inform HMRC if the dividends you received are within the year’s dividend limit.
If you receive more than the limit but less than £10,000 in dividends, notify HMRC by calling the helpdesk, updating your tax code so HMRC can deduct the tax from your salary or retirement benefits, or adding it on information on your self-assessment tax return if you already file one. Fill out a self-assessment tax form if you receive above £10,000 in dividends.
Dividends can actually be useful because the dividend tax rate is 7.5 per cent up to £50,270 in earnings, whereas a wage attracts 20 per cent Income Tax and a 12 per cent National Insurance payment for most UK citizens. This equates to a 32 per cent tax rate on any earnings above the annual tax and NI exemptions.
However, a dividend is not always recommended or approved, so check with your accountant about the most cost-effective and tax-efficient method of distributing dividends. The most favourable solution will vary depending on your company’s financial situation as well as your own financial situation.
In the beginning, establishing a limited company requires additional paperwork, more rigorous record-keeping and maintaining an annual accounts report. Hiring qualified accountant guarantees that your financial records are correct and well-maintained and that you do not violate the tax office.
You may be in a more critical place if you, as a small firm, choose to be established as a limited liability company considering the following factors:
Prospective Tax benefits
Prevention from Liabilities
Customer awareness and insight
Financial institutions, funders, and prospective customers with specific requirements
adaptability in your money matters
Bloom Financials can provide you with comprehensive professional advice on whether or not you should structure your business as a limited company.
If you don’t use all of the proper documentation when issuing a dividend, HMRC may opt to classify the payments as salary rather than dividends. Our accountants are always available to assist and are experienced in taxation in the United Kingdom, particularly dividend tax. But when it comes to dividends, our breadth of experience can assist you in making the best decision possible. Our tax experts would be happy to review your strategy to ensure you’re getting the most out of the low dividend tax rates. Feel free to contact us and get your current tax structure reviewed today.
In recent years, an increasing number of businesses have considered crowdfunding to acquire capital. So, what is crowdfunding exactly, and how does it work?
Crowdfunding, which is commonly considered an alternative source of corporate finance, involves a large number of individuals contributing small amounts of capital that contribute to a funding target set by the company. Crowdfunding allows companies to raise funds without turning to traditional sources of money. It’s getting increasingly popular, especially as the economy continues to deteriorate during the pandemic and current global economic situation.
It is a method of getting funding for projects, campaigns, charities, and enterprises from many individual investors, usually through the use of an online platform. These businesses can get off the ground or start new projects by receiving the necessary cash flow boost. An entrepreneur can pitch their business or idea to almost everyone globally by using a web-based crowdfunding platform or social media. Most of these campaigns take place on the internet, have specified deadlines for raising funds, and declare specific financial goals.
Those looking to invest can be connected with suitable businesses, with some simply selecting what they consider to be a solid investment opportunity with significant returns.
The exposure of the firm seeking funding to a large number of possible investors, as well as the opportunity to express their objectives, aims, and future aspirations in detail, is an additional benefit for the company seeking money. This is especially useful for retail businesses, as it quickly locks in customer loyalty.
Companies seeking to crowdfund in the UK use a variety of web-based platforms, including Kickstarter, Crowdcube, Seedrs, Crowdfunder, Indiegogo, and Funding Circle. Crowdfunding pages are typically hosted on the platform, which collects donations from investors while also giving them with online accounts and transparency into the process. To obtain loans or investments from as many people as possible, a company or individual seeking funding will typically pitch their project online, where a potentially millions-strong audience awaits.
In turn, the platform will pay the project initiator the funds gathered from the investors/audience, with a tiny amount taken as a service fee. There will be different criteria for applying to pitch and how much they can raise on each platform. It would be best to thoroughly explore the various crowdfunding sites to choose which platform is perfect for your business. It’s a wise idea to study their regulations thoroughly before deciding on a platform so that you don’t have to stop your campaign before it even gets started. Online crowdfunding platforms also allow borrowers to present their growth plans in a complete online document containing the regular cash flow and sales projections and an idea of their outcome.
There are many different crowdfunding platforms available, each with its own set of objectives and potential profits for investors. They usually fall under one of several categories, such as:
Crowdfunding pages are typically hosted on these platforms by individuals or organisations seeking funding for philanthropic causes. Donation-based crowdfunding is when people donate money to a campaign, a company, or a person in exchange for nothing. Individuals who donate money do so solely to assist your company’s growth.
These are peer-to-peer (P2P) lending donations based on debt. It comprises a group of micro-investors, where borrowers pay pre-agreed interest to lenders who expect their money back. This is more like a typical loan in that the investors are looking for a return on their initial investment as well as a set interest rate.
When you use rewards-based crowdfunding, you provide individuals with the opportunity to be the first to buy a new product or receive a gift in exchange for funding. It is the most common type of crowdfunding platform used by small businesses. Investors will typically expect a return on their investment in the form of early access to the service under development or a free product once it is completed. While there have been some significant triumphs, you usually need a great prototype and strong marketing skills to succeed in this field.
Investors contribute money to a company in exchange for equity shares under equity-based crowdfunding. This is similar to selling stock in a company as a particular amount of equity in the company is exchanged for a certain amount of capital. Small companies and start-ups can use equity-based crowdfunding to give away a share of their company in exchange for funding. Investors will get dividends or distributions as the business expands and revenues increase in the future.
These contributions are a sort of investment in which participants obtain shares in the company based on the amount of money they contribute. Giving away equity can help start-ups get an alternate source of financing, but it can also result in the company’s control being compromised, which can lead to future challenges. However, one of the benefits of equity-based crowdfunding is that it allows you to attract and reach out to both potential customers and investors.
Many people believe that crowdfunding is a simple or free way to make money, but it takes hard work to create a project that backers would consider valuable. As the popularity of crowdfunding grows, backers are becoming more discerning about the initiatives they support.
It can be challenging to get such widespread support. It takes a powerful marketing campaign, dependable founders, and a high-quality product to succeed. The challenges of crowdfunding are numerous for a company that only offers crowdfunded products. The following are the key challenges that must be considered carefully for the crowdfunding campaigns:
Trust Building – you must establish your brand’s credibility to attract potential investors’ attention.
Choosing the Best Platform – it’s a good idea to check a site’s amount of visitors, the types of visitors it gets, the total cost of operating the crowdfunding campaign, and the terms and conditions of using the platform to raise funds and select the best that fits your idea.
Developing enthusiasm in contributors – before launching a campaign to raise funding, you should get people interested in your idea.
Protect your idea from theft – register a copyright application straight away and share limited information publicly
Investor Recompense Planning – commit yourself and meet backers or rather investors desires as you had it in agreement, during and after the campaign.
Avoid ending up failing – be sure that your idea is realistic and sounds successful before going for an investor.
Here are some recommendations for choosing the best platform for you:
A rewards-based platform may be suitable for you if you’re a seed or pre-seed firm with a compelling idea, a B2C (business to consumer) company, and can strike your marketing strategy.
You might seek equity-based crowd funders if you’re already successful in your chosen market and have a targeted clientele that would allow you to expand and scale.
A loan-based platform may be a better option than a bank if you have a steady cash stream and consistent revenues.
Once you’ve decided that crowdfunding is right for your business, how can you ensure a successful pitch and start an effective campaign? Here are a few points to be considered:
Whatever crowdfunding method you choose for your company, keep in mind that the campaign’s success is dependent on the marketing strength you put behind it. A compelling story is attractive to both investors and donors. Explain how you came up with the idea, your team’s personality, and why your product is valuable. Don’t try to sell too aggressively; instead, let your product speak for itself. You’ll need to tell that story through your project page’s content, a video, and outreach via social media, your blog, email, and any other channel you can think of.
For the best crowdfunding outcomes, plan for the campaign before initiating it. Spread the word to your family and friends that you’ll be starting a campaign. Before the launch, be active on your personal and company social media profiles. Make it as easy as possible for potential backers to locate you.
It takes time to create suitable marketing materials. Don’t try to make an informative video the day before the campaign begins; give yourself plenty of time to perfect it. Investing a few extra weeks in developing a strategy and raising awareness about your campaign will help you meet your crowdfunding target.
Setting up a crowdfunding page will vary differently depending on the platform. However, the following are the most important aspects:
A thorough description of the project or company idea is offered on a crowdfunding page, including written and audio-visual communication as needed. Cover all of the critical aspects without going into too much detail. Include a variety of content photographs, testimonials, videos, and statistics to make your offer stand out and be recognised.
The project’s background should be explained, giving as much information as possible about the project’s history and inspiration, among other things.
It’s critical to have detailed information about the project’s initiators, including relevant abilities and prior experience.
The project’s timetable, anticipated milestones, and budget should be well-defined.
Offer tiers of incentives to encourage greater levels of investment. Details of the rewards are usually a free product or a subscription to a service. A discount on an early order, or first-run of your product, is the most common offer. It’s crucial to explain any different incentives based on the amount of money invested.
Grab the attention of investors on as many social media platforms as possible, such as Facebook and Twitter. Instagram is a must if your product is visual. Make use of your current network and tell people what you’re up to, and urge them to tell their friends and coworkers. Make a contact list and start email campaigns frequently. Blogging, forums, social media influencers, google AdWords, shops & exhibitions are also the most effective tools during the promotions period.
Don’t sit back and relax after you’ve launched your campaign. It is essential to provide regular updates to investors, in addition to creating a detailed crowdfunding page, to ensure that they are aware of how the project is progressing. Interact with your followers, keep sending emails, keep updating your content, and let them know when you’ve hit a campaign milestone.
One of three situations happen once your crowdfunding campaign ends:
If the campaign falls short of its goal, contributions are returned to investors. If you don’t meet your target, some crowdfunding services still allow you to collect all of the money you’ve received, however, at a small charge.
If your campaign is successful, you will be paid the total amount you collected, less handling fees. Kickstarter, for example, charges a 5% fee to host the fundraising and a percentage-based cost to handle payments. These charges are only applicable for successful crowdfunding campaigns; those that do not meet their funding target will not be charged.
Because you still owe money to your donors, equity crowdfunding projects vary as far as how they end. This responsibility is contingent on the outcome of the contributions.
Whereas crowdfunding doesn’t ensure a project’s success or a company’s long-term viability, it enables many entrepreneurs to gain business acumen and foster collaboration for future prospects.
The following are some of the benefits of using the strategy:
Alternate funding source with little financial risk
It might be a cost-effective approach to raise capital with no upfront costs. Businesses that are unable to get financing through more traditional methods can use crowdfunding as an alternative source of funding. Instead of pitching each investor individually, you can build up your campaign fast and easily on the right platform and have it seen by millions of potential funders all at once.
Increased brand awareness
Pitching a concept or business over the internet may be a powerful method of marketing that attracts media attention. When you’ve successfully attracted a few investors, others will likely follow, and your campaign will get more traction.
Free marketing
Early adopters and supporters of your company are likely to promote it on social media as well. You can also use the platform for public relations and marketing, bringing visitors to your website.
Accelerate your business
Many products would never have seen the light if it hadn’t been for online crowdsourcing. Ideas that may not appeal to traditional investors are often more easily funded. This is especially true for quite niche products and may be disregarded by a conventional investor.
Test the market prior to launch
It’s a great strategy to see how the general public reacts to your idea; if people are eager to invest, it’s a good sign that your concept will succeed in the market. Because you’ll be attracting potential clients and contributors to your company, you’ll most likely get a lot of feedback on your product. You can then fine-tune your idea to make it as appealing as possible.
Before starting a crowdfunding campaign, consider the following disadvantages:
Crowdfunding requires resources
When you’ve selected your platform, you’ll need to put in a lot of effort to build interest before the project officially launches; significant efforts and financial and/or time resources may be required.
Stealing ideas
Someone might see your business idea on a crowdfunding site and steal it if you haven’t protected it with a patent or copyright. Make sure you’ve registered any trademarks or domain names you need before going live.
Oversaturated market
As the crowdfunding industry is so crowded, you’ll have to make sure your product is one-of-a-kind and provides significant value to your customers. With a strong pre-launch strategy, you’ll have to work extra hard to make your campaign shine out.
Potential for no or too little gain
Most crowdfunding platforms require you to reach your funding goal before receiving any funds. Suppose you don’t get there in time. In that case, funds are typically returned to investors in this situation, and the project is unable to proceed, you won’t get anything, which can affect your company’s reputation.
Scammers
Scammers are by far the most common type of con in the crowdfunding world. There are many projects that have a successful fundraising campaign but fail to complete the project.
Among the topics discussed, you should consider how long your crowdfunding campaign should last, how to stay in the spotlight to funders if you’re doing equity crowdfunding, and how to keep your campaign’s enthusiasm if you want it to be a huge success.
There’s no such thing as a one-size-fits-all strategy to crowdfunding, so be sure you know what you want to accomplish with your campaign and compare your possibilities. Crowdfunding isn’t always straightforward, so plan to ensure you have a good idea and proposal.
However, if you put up the effort to promote your campaign, crowdfunding may be a valuable resource, whether you’re launching a new product, looking to expand operations, or simply trying to gauge your audience’s interest. As we’ve seen, if you’ve pre-qualified under the Enterprise Investment Scheme or Seed Enterprise Investment Scheme, you’ll be the most desirable to savvy investors. Our knowledgeable tax professionals can assist you in preparing your firm to be eligible for the scheme. Find out how Bloom financials can help you with crowdfunding project planning, development, and success. Feel free to contact us.
The concept of tax reduction is intriguing. While responsible businesses want to pay their dues, they also don’t want to pay any more than is essential. The UK tax system is complex, but there are several reasonable ways to reduce your corporate tax burden. All you need is a basic awareness of how the UK tax system operates and what tax credits and incentives are available.
Limited companies, international corporations with local branches, and other profit-making unincorporated firms pay corporation tax (CT) on trading profits, investments, and gains from asset sales. The company tax bill is now 19 per cent, but the chancellor announced on 3rd March 2021 that starting in April 2023, the headline rate will be raised to 25 per cent.
For the current tax year, the Corporation Tax rate on company earnings is 19 per cent, which means that an organisation with a profit of £100,000 pays £19,000 in Corporation Tax. However, claiming every allowable cost and relief and providing a more realistic picture of the firm’s earnings is the key to ensuring your company pays no more Corporation Tax than it has to.
Let’s take a look at some of the government tax reliefs and incentives that our specialist accountants have prepared to assist you to decrease your corporation’s tax bill while staying tax effective.
If you have previously paid foreign tax on income typically taxed in the UK, you can claim Foreign Tax Credit Relief.
It’s possible that your earnings and gains will be taxed in more than one country. For example, if you live in the UK and earn money from a job overseas, your foreign earnings may be taxed in the UK and the nation from which you earned them. Credit relief reduces the amount of UK corporation tax owed on the same profits if a firm has paid foreign tax on those profits. In situations where the foreign tax on those profits exceeds the UK corporation tax on such gains, the unutilised foreign tax can be carried back one year or carried forward in specific circumstances.
There are three ways in which the UK ensures that no one bears a double burden:
Tax treaties may decrease or eliminate double taxation.
If no treaty exists, a person can seek ‘partial’ relief by deducting foreign tax from their UK tax.
The individual can deduct the foreign tax as an expense from their income (a practice known as relief by deduction). However, this is often inefficient.
When you disclose your foreign income on your Self Assessment tax return, you can claim Foreign Tax Credit Relief. You must register for Self Assessment by 5th October of each year and pay by 31st January of the year following the tax year for which you are paying.
If all of the following apply, however, you do not require to file a tax return:
Dividends are your only source of overseas revenue.
You have less than the £2,000 dividend allowed in total dividends (including UK dividends).
You don’t have any additional sources of income to declare.
The amount of relief you receive is determined by the UK’s ‘double-taxation agreement’ with the country from where your income originates. Even if there is no agreement, you will normally obtain relief unless the foreign tax does not correlate to UK Income Tax or Capital Gains Tax.
A corporation can deduct certain expenditures and costs from its profits to reduce the amount of tax it pays. Business entertainment expenses and capital expenditures are not included in these expenses. A company’s capital expenditure is the money it spends on land, buildings, and equipment.
Capital expenditures on certain types of business assets and business premises can be claimed as capital allowances by a company. Capital allowances provide substantial tax relief in the United Kingdom for “capital” investments in facilities and equipment for businesses. Capital expenditure provides an asset or a competitive advantage that lasts for a few years or longer. It is often recognised as a tangible fixed asset on a company’s balance sheet.
The net cost of the company asset or premises is used to determine capital allowances. There are different rates available depending on the type of asset. A company can claim capital allowances on:
plant and machinery
motor vehicles
industrial buildings
transmission capacity rights
computer software
specified intangible assets.
Once the value of the assets has been determined, the difference can be deducted from the profits before tax is calculated. Capital allowances can be claimed for the following items in addition to equipment and machinery:
renovating business properties in disadvantaged areas of the UK
mineral extraction and dredging
research and development (R&D)
Patents and “expertise” (intellectual property relating to industrial practices)
Buildings and structures (i.e. construction costs)
The two most commonly claimed forms of capital allowances are “plant & machinery allowances” (PMAs) and “structures & buildings allowances” (SBAs).
Capital allowances are calculated by multiplying the amount of expenditure that qualifies for capital allowances by the business’s effective tax rate. For example, A firm subject to the 19 per cent corporation tax rate invests £100,000 in assets qualifying for capital allowances. By claiming capital allowances, the corporation may that £100,000 in tax from its profits. This saves £19,000 in corporate tax (£100,000 multiplied by 19%).
So, every £1 spent on equipment qualifying for capital allowances is worth a tax saving of 19p at the 19% corporation tax rate applying until April 2023. Or 25p at the 25% rate coming into force after April 2023. For income taxpayers, the savings are typically higher because the basic rate of income tax is 20%, the higher rate is 40%, and the additional rate is 45% (the marginal rate for a slice of certain taxpayers’ income can be as high as 60% Because the basic tax-free personal allowance is gradually reduced by £1 for every £2 of income exceeding £100,000)
However, the computation is frequently more difficult due to the several types of capital allowances available, each with a distinct amount and rate of tax relief. As a result, the time it takes to receive tax relief might vary.
The expenditure must be spent on a particular type of asset. In most cases, you must own the asset for which you are claiming capital allowances. In other words, if you rented or leased the asset, you won’t be able to claim capital allowances, but you could be able to get tax relief on the rental charges as revenue expenditure.
Assets bought through hire purchase, or financing leases are subject to special rules. Even though legal ownership may not pass until the conclusion of the contract term, these assets are often viewed as belonging to the person who is utilising them. These assets must have been put to use to claim capital allowances. Any interest paid on hire purchase items is considered a revenue (trading) expense rather than capital expenditure. When an established firm has plant and machinery or other assets, capital allowances must be addressed in business planning.
Annual Investment Allowance (AIA) is a type of capital allowance. Capital allowances can be claimed for most purchases of plant and machinery and business vehicles. Different types of expenditure qualify for different capital allowances.
Most plants and machinery are eligible for AIA. This implies that before calculating your tax, you can deduct the whole cost of the item from your profits. Each time you start a new accounting period, a new AIA allowance rolls in, and if you spend more than the AIA amount, you can claim writing down allowances on that additional expenditure.
Claiming for automobiles, items you possessed for a different reason before starting to use them in your business, or items donated to you or your firm, must be done by writing down allowances rather than AIA.
In the first year, you can generally claim the whole amount as a capital allowance if your total capital expenditure is less than a specified annual investment allowance (AIA). From 1st January 2019 to 31st December 2021, the AIA will be set at £1 million before returning to its normal level of £200,000. This is limited to a single allowance for groups of companies or associated businesses. From 1st January 2019, the increased yearly investment allowance will be accessible for a three-year period.
Suppose your company purchases equipment that qualifies for the Annual Investment Allowance. In that case, you can deduct 100 per cent of that item’s cost from your profit before calculating how much tax you owe. If your company is VAT registered, you can claim the Annual Investment Allowance based on the entire cost of the asset less any VAT you can recover. If your company isn’t VAT-registered, you can claim the Annual Investment Allowance on the asset’s whole cost.
Relief for research and development (R&D) is intended to assist companies working on breakthrough science and technology initiatives. To qualify for R&D tax credits, businesses must be working on a specific project.
If your company is developing new products, processes or software, it may be eligible for this tax relief. This can equate to additional tax relief of up to £ 24,700 for every £100,000 spent on research. You can opt to claim an R&D tax credit of up to 14.5 per cent if you invest in R&D and your firm makes a loss, in addition to tax relief. In this case, the government provides you with a cash payment.
Loss-making businesses can take advantage of this corporate tax relief to grow their losses, which they can then offset against past or future earnings or claim as a cash tax credit.
Depending on the size of your organisation and whether or not the project has been subcontracted to you, there are numerous forms of R&D relief.
Small and medium-sized enterprises (SME) R&D Relief
To be eligible for R&D tax reliefs, your company must employ less than 500 people and have a turnover of less than €100 million or a balance sheet total of less than €86 million. You’ll need to offer numbers indicating the voting rights of related or partner firms if your company has external investors because you raised venture funding.
Research and development (R&D) expense qualify for corporation tax exemption. To claim for R&D relief, you do not have to develop or create cutting-edge technology. This R&D tax relief allows you to deduct these expenditures from your trading earnings while also claiming up to an extra 130 per cent (a total of 230 per cent) in corporation tax relief.
Research and Development Expenditure Credit (RDEC)
For large corporations, the regulations are slightly different. This takes the place of the large company relief that was previously offered. Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects. A Research and Development Expenditure Credit can be claimed by large corporations working on R&D projects (or by companies that have been subcontracted to conduct R&D work by a large company). This is essentially a tax credit equal to 13% of a company’s eligible R&D expenditures.
Costs you can claim include:
Employee costs. Salaries, wages, Class 1 NICs and pension contributions for staff directly working on your project.
Subcontractor costs. 65% of relevant costs for subcontractors used in your project.
Software. Software licence fees and a ‘reasonable share’ of software partly used in your project.
Consumables. A proportionate amount of materials and utilities were used in your project.
If you match the requirements, you’ll be able to claim lower tax payments on your project from the time it begins until the time you produce or discover the advance or until the project is completed. Relief can be requested for up to two years after the relevant accounting period has ended.
Fill out the increased expenditure section of your complete Company Tax Return form to submit a claim for R&D tax reliefs. GOV.UK also offers an online service that provides information and guidance on how to support your claim, including what information you should provide about your project.
HMRC administers this scheme, intended to recognise and reward innovative UK businesses. According to the Patent Box scheme, profits made from any of a company’s patented ideas can be taxed at a reduced rate. Qualifying businesses who successfully elect to the Patent Box can effectively cut their Corporation Tax from the standard rate to the reduced rate. The rate for 2021/22 is ten per cent.
Companies with income related to eligible patents that they either own or have an exclusive license to commercialise pay just 10% corporate tax under the ‘Patent Box’ scheme. Profits can include a significant portion of the trading profit from the sale of a patent-protected product, not just royalties from the patent.
Sales revenue from patents or patent-protected items is the most important category. For all of a product’s income to fall under the regime, it needs one patented component. Patent rights you sell or licence, sales of patented items or products containing a patented innovation, intellectual property infringement money, or damages or compensation related to your patent rights must all contribute to your earnings.
To be qualified for the Patent Box system, you must first be a UK limited business that pays UK corporate tax. Second, you must have created an original product or procedure and applied for a patent. Finally, income from the patented innovation must have been generated.
To qualify for Patent Box, a company liable to UK corporation tax must profit from exploiting qualifying patented inventions (or certain medicinal or botanic innovation rights). Although there are specific exclusions, such as business procedures and mathematical methods, patents can be sought in practically every technology field. However, if the idea is technical, it stands a possibility of getting patented. The company must possess qualifying patents or have exclusive licences to those patents from the UK Intellectual Property Office, the European Patent Office, or certain European patent offices.
The revised patent box scheme went into effect on 1st July 2016 for new applications to the programme and is pretty similar to the original, except that it employs the globally recognised ‘Nexus’ approach to benefit calculations. As a result of this strategy, the advantages of the patent box are reduced by an ‘R&D fraction,’ which is based on the proportion of research and development incurred by the firm (in-house or contracted to third parties) as opposed to that outsourced to related parties (e.g., other businesses in a group). As a result, some organisations may need to rearrange their R&D operations to recoup equivalent advantages as under the previous model. Similarly, the R&D percentage considers the part of research and development represented by any acquired intellectual property (e.g., licenced in). The way R&D expenses are tracked and linked to the IP right or covered product has also changed.
To make a claim, you must first enrol in the Patent Box scheme and have a patent that has been granted. This must be completed within two years after the end of the accounting period in which the relevant profits and income were generated. You can make your choice either in the calculations that accompany your Corporation tax return or separately in writing. You can accumulate patented earnings for patents applied for but not granted while under the Patent Box system. If the patent is granted, these cumulative earnings might be included in the Patent Box claim. This election does not have a particular wording or a box on the Corporation Tax return.
There are eight different types of Corporation Tax reliefs available to qualified companies in the creative industries, each of which allows them to raise the amount of permissible spending, lowering their overall Corporation Tax bill.
Companies that benefit from films, ‘high-end’ television, children’s television, animation television, video games, theatrical plays, orchestral concerts, museum or gallery exhibitions, and other creative industries can claim tax relief. It is made up of the following eight corporation tax reliefs:
Film Tax Relief
Animation Tax Relief
High-end Television Tax Relief
Video Games Tax Relief
Children’s Television Tax Relief
Theatre Tax Relief
Orchestra Tax Relief
Museums and Galleries Exhibition Tax Relief
All films, animation, television shows, and video games must be certified as “British.” Alternatively, they must pass a cultural test or meet the requirements of an international co-production pact. The British Film Institute is in the authority of this procedure on behalf of the Department for Digital, Culture, Media and Sport.
For computing Corporation Tax, trading losses can be used to seek tax relief. Companies’ trading losses are calculated in the same way as their trading gains. To receive tax relief, the loss is adjusted against other business earnings or profits in the same accounting period.
Capital allowances (which raise the loss) and balancing charges (which lessen the loss) should both be included when calculating a trading loss. Any losses or earnings resulting from the sale or disposal of assets should be excluded. Set-off against other gains might provide relief from the loss. This can be done by filing a claim to offset the loss against the same accounting period’s total profits or, if the loss exceeds those earnings, against the prior twelve months’ total profits.
Alternatively, the loss, or the balance of the loss, might be carried forward to future accounting periods and deducted from future earnings. If the company is part of a group, a loss might be surrendered to another company in the group to be offset against earnings, either in the same period or later.
Businesses that use non-domestic premises must pay business rates equivalent to council tax. These are often seen as a business expense that is tax-deductible. A ratepayer may be eligible for rate relief depending on their specific circumstances (i.e., a reduction in their business rates bill). A variety of reliefs are offered. More info is accessible at www.gov.uk/introduction-to-business-rates, your local authority’s website (which is usually included on your rates statement), or by calling your local authority.
Many businesses might also qualify for business rate relief, which reduces the standard rate. Businesses in England’s retail, hotel and recreation sectors are free from business rates during the tax year 2020-2021 due to the Coronavirus pandemic.
Tax is a challenging, ever-changing field, and each firm has a unique position for it. As a result, specific allowances or deductions may be available based on the nature of their operation. Therefore, it is usually a prudent option to obtain expert advice from an accountant before applying any company deduction strategies. The government’s recommendations and reliefs for lowering corporation tax in certain areas are complicated and require professional assistance. Businesses that want to decrease their Corporate Tax burden must be diligent in tracking and claiming all of their costs.
Businesses should be constantly adaptable to new tax regimes, as well as the amendments and updates of sectors from government-funded tax reliefs, to ensure that they do not miss out on valuable tax relief opportunities. Our London-based accountants help businesses all over the UK save money on taxes by utilising innovative solutions and industry knowledge. Don’t hesitate to get in touch with us, and the Bloom Financials staff would be pleased to assist you.
The concept of tax reduction is intriguing. While responsible businesses want to pay their dues, they also don’t want to pay any more than is essential. The UK tax system is complex, but there are several reasonable ways to reduce your corporate tax burden. All you need is a basic awareness of how the UK tax system operates and what tax credits and incentives are available.
Limited companies, international corporations with local branches, and other profit-making unincorporated firms pay corporation tax (CT) on trading profits, investments, and gains from asset sales. The company tax bill is now 19 per cent, but the chancellor announced on 3rd March 2021 that starting in April 2023, the headline rate will be raised to 25 per cent.
For the current tax year, the Corporation Tax rate on company earnings is 19 per cent, which means that an organisation with a profit of £100,000 pays £19,000 in Corporation Tax. However, claiming every allowable cost and relief and providing a more realistic picture of the firm’s earnings is the key to ensuring your company pays no more Corporation Tax than it has to.
Let’s take a look at some of the government tax reliefs and incentives that our specialist accountants have prepared to assist you to decrease your corporation’s tax bill while staying tax effective.
If you have previously paid foreign tax on income typically taxed in the UK, you can claim Foreign Tax Credit Relief.
It’s possible that your earnings and gains will be taxed in more than one country. For example, if you live in the UK and earn money from a job overseas, your foreign earnings may be taxed in the UK and the nation from which you earned them. Credit relief reduces the amount of UK corporation tax owed on the same profits if a firm has paid foreign tax on those profits. In situations where the foreign tax on those profits exceeds the UK corporation tax on such gains, the unutilised foreign tax can be carried back one year or carried forward in specific circumstances.
There are three ways in which the UK ensures that no one bears a double burden:
Tax treaties may decrease or eliminate double taxation.
If no treaty exists, a person can seek ‘partial’ relief by deducting foreign tax from their UK tax.
The individual can deduct the foreign tax as an expense from their income (a practice known as relief by deduction). However, this is often inefficient.
When you disclose your foreign income on your Self Assessment tax return, you can claim Foreign Tax Credit Relief. You must register for Self Assessment by 5th October of each year and pay by 31st January of the year following the tax year for which you are paying.
If all of the following apply, however, you do not require to file a tax return:
Dividends are your only source of overseas revenue.
You have less than the £2,000 dividend allowed in total dividends (including UK dividends).
You don’t have any additional sources of income to declare.
The amount of relief you receive is determined by the UK’s ‘double-taxation agreement’ with the country from where your income originates. Even if there is no agreement, you will normally obtain relief unless the foreign tax does not correlate to UK Income Tax or Capital Gains Tax.
A corporation can deduct certain expenditures and costs from its profits to reduce the amount of tax it pays. Business entertainment expenses and capital expenditures are not included in these expenses. A company’s capital expenditure is the money it spends on land, buildings, and equipment.
Capital expenditures on certain types of business assets and business premises can be claimed as capital allowances by a company. Capital allowances provide substantial tax relief in the United Kingdom for “capital” investments in facilities and equipment for businesses. Capital expenditure provides an asset or a competitive advantage that lasts for a few years or longer. It is often recognised as a tangible fixed asset on a company’s balance sheet.
The net cost of the company asset or premises is used to determine capital allowances. There are different rates available depending on the type of asset. A company can claim capital allowances on:
plant and machinery
motor vehicles
industrial buildings
transmission capacity rights
computer software
specified intangible assets.
Once the value of the assets has been determined, the difference can be deducted from the profits before tax is calculated. Capital allowances can be claimed for the following items in addition to equipment and machinery:
renovating business properties in disadvantaged areas of the UK
mineral extraction and dredging
research and development (R&D)
Patents and “expertise” (intellectual property relating to industrial practices)
Buildings and structures (i.e. construction costs)
The two most commonly claimed forms of capital allowances are “plant & machinery allowances” (PMAs) and “structures & buildings allowances” (SBAs).
Capital allowances are calculated by multiplying the amount of expenditure that qualifies for capital allowances by the business’s effective tax rate. For example, A firm subject to the 19 per cent corporation tax rate invests £100,000 in assets qualifying for capital allowances. By claiming capital allowances, the corporation may that £100,000 in tax from its profits. This saves £19,000 in corporate tax (£100,000 multiplied by 19%).
So, every £1 spent on equipment qualifying for capital allowances is worth a tax saving of 19p at the 19% corporation tax rate applying until April 2023. Or 25p at the 25% rate coming into force after April 2023. For income taxpayers, the savings are typically higher because the basic rate of income tax is 20%, the higher rate is 40%, and the additional rate is 45% (the marginal rate for a slice of certain taxpayers’ income can be as high as 60% Because the basic tax-free personal allowance is gradually reduced by £1 for every £2 of income exceeding £100,000)
However, the computation is frequently more difficult due to the several types of capital allowances available, each with a distinct amount and rate of tax relief. As a result, the time it takes to receive tax relief might vary.
The expenditure must be spent on a particular type of asset. In most cases, you must own the asset for which you are claiming capital allowances. In other words, if you rented or leased the asset, you won’t be able to claim capital allowances, but you could be able to get tax relief on the rental charges as revenue expenditure.
Assets bought through hire purchase, or financing leases are subject to special rules. Even though legal ownership may not pass until the conclusion of the contract term, these assets are often viewed as belonging to the person who is utilising them. These assets must have been put to use to claim capital allowances. Any interest paid on hire purchase items is considered a revenue (trading) expense rather than capital expenditure. When an established firm has plant and machinery or other assets, capital allowances must be addressed in business planning.
Annual Investment Allowance (AIA) is a type of capital allowance. Capital allowances can be claimed for most purchases of plant and machinery and business vehicles. Different types of expenditure qualify for different capital allowances.
Most plants and machinery are eligible for AIA. This implies that before calculating your tax, you can deduct the whole cost of the item from your profits. Each time you start a new accounting period, a new AIA allowance rolls in, and if you spend more than the AIA amount, you can claim writing down allowances on that additional expenditure.
Claiming for automobiles, items you possessed for a different reason before starting to use them in your business, or items donated to you or your firm, must be done by writing down allowances rather than AIA.
In the first year, you can generally claim the whole amount as a capital allowance if your total capital expenditure is less than a specified annual investment allowance (AIA). From 1st January 2019 to 31st December 2021, the AIA will be set at £1 million before returning to its normal level of £200,000. This is limited to a single allowance for groups of companies or associated businesses. From 1st January 2019, the increased yearly investment allowance will be accessible for a three-year period.
Suppose your company purchases equipment that qualifies for the Annual Investment Allowance. In that case, you can deduct 100 per cent of that item’s cost from your profit before calculating how much tax you owe. If your company is VAT registered, you can claim the Annual Investment Allowance based on the entire cost of the asset less any VAT you can recover. If your company isn’t VAT-registered, you can claim the Annual Investment Allowance on the asset’s whole cost.
Relief for research and development (R&D) is intended to assist companies working on breakthrough science and technology initiatives. To qualify for R&D tax credits, businesses must be working on a specific project.
If your company is developing new products, processes or software, it may be eligible for this tax relief. This can equate to additional tax relief of up to £ 24,700 for every £100,000 spent on research. You can opt to claim an R&D tax credit of up to 14.5 per cent if you invest in R&D and your firm makes a loss, in addition to tax relief. In this case, the government provides you with a cash payment.
Loss-making businesses can take advantage of this corporate tax relief to grow their losses, which they can then offset against past or future earnings or claim as a cash tax credit.
Depending on the size of your organisation and whether or not the project has been subcontracted to you, there are numerous forms of R&D relief.
Small and medium-sized enterprises (SME) R&D Relief
To be eligible for R&D tax reliefs, your company must employ less than 500 people and have a turnover of less than €100 million or a balance sheet total of less than €86 million. You’ll need to offer numbers indicating the voting rights of related or partner firms if your company has external investors because you raised venture funding.
Research and development (R&D) expense qualify for corporation tax exemption. To claim for R&D relief, you do not have to develop or create cutting-edge technology. This R&D tax relief allows you to deduct these expenditures from your trading earnings while also claiming up to an extra 130 per cent (a total of 230 per cent) in corporation tax relief.
Research and Development Expenditure Credit (RDEC)
For large corporations, the regulations are slightly different. This takes the place of the large company relief that was previously offered. Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects. A Research and Development Expenditure Credit can be claimed by large corporations working on R&D projects (or by companies that have been subcontracted to conduct R&D work by a large company). This is essentially a tax credit equal to 13% of a company’s eligible R&D expenditures.
Costs you can claim include:
Employee costs. Salaries, wages, Class 1 NICs and pension contributions for staff directly working on your project.
Subcontractor costs. 65% of relevant costs for subcontractors used in your project.
Software. Software licence fees and a ‘reasonable share’ of software partly used in your project.
Consumables. A proportionate amount of materials and utilities were used in your project.
If you match the requirements, you’ll be able to claim lower tax payments on your project from the time it begins until the time you produce or discover the advance or until the project is completed. Relief can be requested for up to two years after the relevant accounting period has ended.
Fill out the increased expenditure section of your complete Company Tax Return form to submit a claim for R&D tax reliefs. GOV.UK also offers an online service that provides information and guidance on how to support your claim, including what information you should provide about your project.
HMRC administers this scheme, intended to recognise and reward innovative UK businesses. According to the Patent Box scheme, profits made from any of a company’s patented ideas can be taxed at a reduced rate. Qualifying businesses who successfully elect to the Patent Box can effectively cut their Corporation Tax from the standard rate to the reduced rate. The rate for 2021/22 is ten per cent.
Companies with income related to eligible patents that they either own or have an exclusive license to commercialise pay just 10% corporate tax under the ‘Patent Box’ scheme. Profits can include a significant portion of the trading profit from the sale of a patent-protected product, not just royalties from the patent.
Sales revenue from patents or patent-protected items is the most important category. For all of a product’s income to fall under the regime, it needs one patented component. Patent rights you sell or licence, sales of patented items or products containing a patented innovation, intellectual property infringement money, or damages or compensation related to your patent rights must all contribute to your earnings.
To be qualified for the Patent Box system, you must first be a UK limited business that pays UK corporate tax. Second, you must have created an original product or procedure and applied for a patent. Finally, income from the patented innovation must have been generated.
To qualify for Patent Box, a company liable to UK corporation tax must profit from exploiting qualifying patented inventions (or certain medicinal or botanic innovation rights). Although there are specific exclusions, such as business procedures and mathematical methods, patents can be sought in practically every technology field. However, if the idea is technical, it stands a possibility of getting patented. The company must possess qualifying patents or have exclusive licences to those patents from the UK Intellectual Property Office, the European Patent Office, or certain European patent offices.
The revised patent box scheme went into effect on 1st July 2016 for new applications to the programme and is pretty similar to the original, except that it employs the globally recognised ‘Nexus’ approach to benefit calculations. As a result of this strategy, the advantages of the patent box are reduced by an ‘R&D fraction,’ which is based on the proportion of research and development incurred by the firm (in-house or contracted to third parties) as opposed to that outsourced to related parties (e.g., other businesses in a group). As a result, some organisations may need to rearrange their R&D operations to recoup equivalent advantages as under the previous model. Similarly, the R&D percentage considers the part of research and development represented by any acquired intellectual property (e.g., licenced in). The way R&D expenses are tracked and linked to the IP right or covered product has also changed.
To make a claim, you must first enrol in the Patent Box scheme and have a patent that has been granted. This must be completed within two years after the end of the accounting period in which the relevant profits and income were generated. You can make your choice either in the calculations that accompany your Corporation tax return or separately in writing. You can accumulate patented earnings for patents applied for but not granted while under the Patent Box system. If the patent is granted, these cumulative earnings might be included in the Patent Box claim. This election does not have a particular wording or a box on the Corporation Tax return.
There are eight different types of Corporation Tax reliefs available to qualified companies in the creative industries, each of which allows them to raise the amount of permissible spending, lowering their overall Corporation Tax bill.
Companies that benefit from films, ‘high-end’ television, children’s television, animation television, video games, theatrical plays, orchestral concerts, museum or gallery exhibitions, and other creative industries can claim tax relief. It is made up of the following eight corporation tax reliefs:
Film Tax Relief
Animation Tax Relief
High-end Television Tax Relief
Video Games Tax Relief
Children’s Television Tax Relief
Theatre Tax Relief
Orchestra Tax Relief
Museums and Galleries Exhibition Tax Relief
All films, animation, television shows, and video games must be certified as “British.” Alternatively, they must pass a cultural test or meet the requirements of an international co-production pact. The British Film Institute is in the authority of this procedure on behalf of the Department for Digital, Culture, Media and Sport.
For computing Corporation Tax, trading losses can be used to seek tax relief. Companies’ trading losses are calculated in the same way as their trading gains. To receive tax relief, the loss is adjusted against other business earnings or profits in the same accounting period.
Capital allowances (which raise the loss) and balancing charges (which lessen the loss) should both be included when calculating a trading loss. Any losses or earnings resulting from the sale or disposal of assets should be excluded. Set-off against other gains might provide relief from the loss. This can be done by filing a claim to offset the loss against the same accounting period’s total profits or, if the loss exceeds those earnings, against the prior twelve months’ total profits.
Alternatively, the loss, or the balance of the loss, might be carried forward to future accounting periods and deducted from future earnings. If the company is part of a group, a loss might be surrendered to another company in the group to be offset against earnings, either in the same period or later.
Businesses that use non-domestic premises must pay business rates equivalent to council tax. These are often seen as a business expense that is tax-deductible. A ratepayer may be eligible for rate relief depending on their specific circumstances (i.e., a reduction in their business rates bill). A variety of reliefs are offered. More info is accessible at www.gov.uk/introduction-to-business-rates, your local authority’s website (which is usually included on your rates statement), or by calling your local authority.
Many businesses might also qualify for business rate relief, which reduces the standard rate. Businesses in England’s retail, hotel and recreation sectors are free from business rates during the tax year 2020-2021 due to the Coronavirus pandemic.
Tax is a challenging, ever-changing field, and each firm has a unique position for it. As a result, specific allowances or deductions may be available based on the nature of their operation. Therefore, it is usually a prudent option to obtain expert advice from an accountant before applying any company deduction strategies. The government’s recommendations and reliefs for lowering corporation tax in certain areas are complicated and require professional assistance. Businesses that want to decrease their Corporate Tax burden must be diligent in tracking and claiming all of their costs.
Businesses should be constantly adaptable to new tax regimes, as well as the amendments and updates of sectors from government-funded tax reliefs, to ensure that they do not miss out on valuable tax relief opportunities. Our London-based accountants help businesses all over the UK save money on taxes by utilising innovative solutions and industry knowledge. Don’t hesitate to get in touch with us, and the Bloom Financials staff would be pleased to assist you.
Tax credits are government payments that provide extra money to individuals who need it, such as parents who need help caring for their children, disabled employees, and low-income persons. Tax credits can be worth thousands of pounds each year, but they must be renewed yearly, unlike many other benefits. If your family or job situation changes, your tax credits may increase, decrease, even stop.
For many people, Universal Credit has recently replaced tax credits. Because Working Tax Credit and Child Tax Credit are being phased out in favour of Universal Credit, you may not be able to file a new claim.
Universal Credit is a government benefit payment that supports those who require additional financial assistance. It’s for low-income individuals, and it may be claimed by those who work full-time, part-time, or are jobless.
Universal Credit was created to take the role of several benefits and credits, such as Working Tax Credit and Child Tax Credit. These are the benefits that will be phased out in favour of Universal Credit:
Income-based Jobseeker’s Allowance
Income-related Employment and Support Allowance
Income Support
Working Tax Credit
Child Tax Credit
Housing Benefit – for rent only
If your circumstances change while receiving one of these benefits or Tax Credits, you must notify the change as quickly as possible. Changes in your circumstances may necessitate a switch to Universal Credit, which will result in the loss of your existing benefits.
Unless you’ve had a change in circumstances that the Department of Works and Pensions (DWP) should be aware of, there’s nothing you need to do if you haven’t heard from the DWP. The Severe Disability Premium is the only benefit not yet replaced by Universal Credit. You will not be eligible for Universal Credit if you already get this benefit.
Depending on your household’s circumstances, you can claim one or both. HM Revenue & Customs (HMRC) is in handling tax credit claims. The credit’s nature determines a tax credit’s value; many tax credits are only available to people or companies in specified localities, categories, or industries.
Tax credits are often seen as a benefit; however, unlike other social security benefits, they are calculated annually and given in weekly or monthly instalments during the tax year (6 April in one year until 5 April the following year). HMRC also handles them, but the Department for Work and Pensions (DWP) deals with most other benefits, including universal credit.
Tax credits will not change the amount of child benefit you receive, but they may influence the amount of other benefits you receive. Signing up for tax credits may result in a reduction in:
Housing Benefit
Income Support
Jobseeker’s Allowance depending on your income
ESA (Employment Support Allowance) based on your income
Pensions Credit
If you sign up for Tax-Free Childcare, you will also be unable to claim tax credits. This is a government programme that gives parents and guardians £500 every three months for each child to help with licensed childcare costs.
However, claiming tax credits may make you eligible for extra money from the government in the form of other benefits. Claiming tax credits may entitle you to handle a lot of daily routine expenses and events.
The amount of tax credits you’re likely to get is determined by the following factors:
The more money you make, the less money you’ll get. However, there is no predetermined income cap because your (and your partner’s, if you have one) circumstances determine how much you earn.
Marital Status. Couples must file joint claims based on their combined income.
The birth dates of your children impact how much help you may get for them.
Working hours. To be eligible, you must work at least a certain number of hours every week. Overtime is only considered if you work the hours on a regular basis.
Disability. Those receiving disability or illness benefits have more options.
A child tax credit is for people who look after any children who are entitled to child benefit (up to 31 August when they reach 16, or up to the age of 20 if they are in full-time education or enrolled with the careers service). Importantly, you are not required to do the job.
To claim the child tax credit, you don’t have to work; instead, you must be responsible for at least one child or eligible young person. You do not have to be the child’s biological parent, but you must be their primary caretaker. If you work, however, you may be eligible to claim both the working tax credit and child tax credit at the same time.
The tax credit is made up of a number of different payments called ‘elements’. Depending on your family circumstances, you may be eligible for either the family element and kid element or a few other elements. How much you can get depends on your income, the number of children you have, and whether any of your children are disabled.
Child tax credit – maximum per element (the more you earn, the less you get)
Family element – the basic element for families with one or more children:
£545 (Max Annual Amount for 2021/22)
Child element: Per child:
£2,845 (Max Annual Amount for 2021/22)
Disabled child element: For each disabled kid who receives disability living allowance (DLA) who is registered blind or has been registered blind in the last 28 weeks:
£3,435 (Max Annual Amount for 2021/22)
Severely disabled child element: Each child is eligible for DLA’s highest rate care component. This is in addition to the child and disability elements:
The child tax credit will be paid until your child turns 16 in September of the following year. If your child turned 16 on 1 June 2021, for example, your child tax credit would end on 1 September 2021.
The only option to keep getting child tax credits after this is if your child is between the ages of 16 and 20 and is enrolled in full-time study or authorised training for which they are not paid. If they don’t have a job of 24 hours or more per week and have registered with their local careers service or Connexions service, 16 to 17-year-olds who aren’t in further education or training can also claim the child tax credit. However, you will be unable to claim if the young person is already receiving income support, disability benefit, employment support allowance, or tax credits.
The highest amount of child tax credit is £16,480, depending on your income. The amount of tax credit you will receive drops by 41p for every £1 of income earned beyond this level every year. If you make more than this, the amount of child tax credit you get reduces.
Working tax credit is a government subsidy that assists low-income workers with day-to-day expenditures. WTC is a payment made by HM Revenue and Customs to complement the earnings of low-wage workers who live in low-income households, whether or not they have children.
If you work a specific number of hours per week and earn less than a certain amount, you might get up to £2,005 in working tax credit in 2021-22, plus an additional one-time £500 payment as part of the government’s plans to mitigate the financial impact of the coronavirus pandemic.
You get whichever aspects apply to you, and the amount of WTC you get once your income is taken into account may be decreased. If you earn more than £6,565, the amount of WTC you may receive will be reduced. Your maximum tax credit claim will be lowered by a percentage of your income beyond the threshold. From April 2021, the following factors and annual amounts will be used:
Basic payment £2,005 a year (plus there is a £500 one-off coronavirus support payment available)
A couple applying together Up to £2,060 a year
A single parent Up to £2,060 a year
Work at least 30 hours a week Up to £830 a year
Disability Up to £3,240 a year
Severe disability Up to £1,400 a year
Approved childcare Up to £175 a week for one child; up to £300 a week for two or more children
Working tax credit is available for periods when you are not working, such as while you are on maternity leave, unwell, or between jobs. Working tax credit is available for the first 39 weeks of maternity leave. To be eligible, you must have been employed and worked the required number of hours prior to taking leave.
If you have any children or young people under the age of 16 born before 6 April 2017, you can collect up to £3,900 in child tax credits each year for your first child and up to £2,845 for each of your additional children until they turn 16. If they stay in authorised school or training, you can continue to claim until they are 20.
If you have a kid after 6 April 2017, you can only get child tax credits if it is your first or second child. There are several exceptions, such as if you’re expecting twins or triplets. Each youngster might get £2,845 per year.
You don’t have to work to earn child tax credits, but your circumstances determine the amount you get. HMRC considers the following factors when determining your claim:
your prior tax year’s income (what you earned for the 12 months up to 5 April)
How many children or young people in authorised education or training do you have in your household
when each of your children was born
If any of these children or young people have a disability
The amount of child tax credit you’ll get is determined by your income, how many children you have at home, and how much money you spend on childcare. If you have a disabled kid, you may be eligible for a higher child tax credit. You don’t have to work to get the child tax credit.
In 2021-22, the basic amount of working tax credit is £2,005, although you may receive more or less. Your payouts are based on your earnings and the number of hours you work. If you have children, you may be able to get additional money since you’ll be eligible for the working tax credit’s childcare element. You may be eligible for the disability element working tax credit if you are a disabled worker.
A tax credits calculator[1] on the GOV.UK website can give you a very basic approximation of what you could get. There are also third-party calculators that may help you figure out if you are eligible for tax credits and other advantages.
If you qualify for the child tax credit and in a job, you may be entitled to claim the working tax credit. You’ll be notified if you are eligible for a Working Tax Credit when you apply for a Child Tax Credit. You do not need to submit separate applications for them. Like a child tax credit, a working tax credit comprises numerous distinct components for which you may be qualified based on your circumstances. The childcare element of the working tax credit may be very beneficial to parents with children. This payment assists in defraying the costs of having someone look after your kid while you are at work.
If you’re eligible, you might be able to claim both the working tax credit and the child tax credit at the same time. You won’t know for sure what you’ll be eligible to claim until you’ve submitted a claim form to HMRC, but in general, the following conditions must apply to your situation.
You may be eligible for a one-off payment of £500 if you’re part of a working household that gets tax credits. When the temporary increase in working tax credit expires on 5 April 2021, the new payment will be issued to give additional support. If you were receiving either the working tax credit or the child tax credit on 2 March 2021 but did not get a payment because your income was too high, you may be eligible.
However, the majority of people are no longer eligible for tax credits. You must apply for universal credit if you require income assistance for the first time or a new claim following a period when you were not claiming tax credits.
If you’re still getting tax credits, you can continue to receive them until your claim is transferred to the universal credit system. You can still lodge a new child tax credit claim if you get the severe disability premium or obtained it in the last month and are still eligible. However, you can no longer file a new claim for working tax credits.
Tax credits, however, cannot be claimed online. You must fill out a paper claim form, which is available from the tax credit helpdesk, in order to claim tax credits. You must also file a joint claim if you live with someone else. If you believe you may be eligible for any or both credits, you should file a claim as soon as possible. You might lose a lot of money if you don’t file your claim immediately.
Working Tax Credit is only available if you are already receiving it or if you are receiving Child Tax Credit. Universal Credit has taken its place for persons who have never claimed a tax credit.
HM Revenue & Customs is in charge of tax credits. Call the helpdesk on 0345 300 3900 or text phone 0345 300 3909 to submit a claim or report a change of circumstances. Lines are open from 8 a.m. to 8 p.m. every day. If you haven’t already claimed tax credits, your claim may only be backdated one month.
You can apply for Working Tax Credit if you have accepted a job offer, and the position is scheduled to start within the following seven days. The work must be expected to last at least four weeks from the moment the claim is filed.
In order to claim, self-employed Working Tax Credit applicants must first register with HMRC for Self-Assessment and give a Unique Tax Reference number. Those with income less than the equivalent of working 24 hours a week at the National Minimum Wage will have to prove to HMRC that the employment they are doing is legitimate and effective.
You have the option of receiving your tax credits once a week or every four weeks. If you’ve submitted a new claim, it might take up to five weeks to be processed. While you wait, you’ll get an ‘award notification’ letter in the mail informing you of the day your first payment will be made. When there is a bank holiday, you will generally get paid early.
Every year, you’ll need to renew your tax credit. Between April and June, you’ll receive a renewal pack in the mail, which you must either fill out and return or phone the Tax Credit Office by 31 July. Tax credits, unlike other benefits, usually need to be renewed by 31 July each year to continue receiving payments from HMRC. You’ll get a renewal pack in the mail between April and July if you already claim tax credits. The dates for the year are determined by the tax year, which runs from 6 April to 5 April the following year. As a result, your pay in 2021-22 will be determined by your earnings in 2020-21.
If you currently receive tax credits, you may also be liable to a retrospective adjustment from past years. You must ensure that all of your information is accurate and current. If you don’t, you may be responsible for any overpayments you get as a result of HMRC holding incorrect information about you. Not everyone is required to renew their tax credits every year; HMRC will notify you. The renewal process is essential because your previous year’s earnings determine the amount of money you’ll receive.
If you have changes and miss the deadline, you risk overpayments or underpayments. If something changes that impact your tax credits, you must notify the tax credit office as soon as possible; otherwise, you may find yourself owing money to the tax credit office – at the very earliest, you should notify the tax office when you get your annual renewal pack. The tax credit office may contact you from time to time to see if your circumstances have changed.
Because payments are anticipated from last year’s income, yet cover this year’s working hours. So, if circumstances change, for example, your income may have altered due to the coronavirus, and you don’t inform them, you may be underpaid or overpaid.
Universal Credit is a new benefit model that will gradually replace the working tax credit and the child tax credit, as well as several other means-tested benefits. Because Universal Credit is being phased across the country, you may have already been shifted to it or will be shortly. Your claim for Tax Credits will expire when you apply for Universal Credit, and your identification is validated.
Everyone on tax credits will be moved to universal credit in the future when HM Revenue & Customs tells you that you need to file a universal credit claim. If your universal credit award is less than your tax credits, you’ll get top-up payments once you’ve made the switch. The top-ups will continue until your circumstances change and you file a new claim.
Depending on where you live, it will happen eventually. If you already get Universal Credit, you won’t be able to apply for working tax credit since the payments you’d get would be included in your Universal Credit payment. Before you get your first Universal Credit payment, your Tax Credits can stop being issued. If this happens, you can request a cash advance to help you get by until your first payment arrives. The only exceptions to Universal Credit are if you have three or more children or if you or your spouse has reached pension credit eligibility age.
You can also find out more about tax credits on GOV.UK. If you have further questions, please use the contact form to contact our advisory team or phone us for professional help at Bloom financials.
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