How to work out tax credits

There is. Pour yourself a stiff drink....

See here for the rates (this year's and next year's):

Add up the elements you're entitled to.

For instance, couple, working 30+ hours, 2 kids, no disabilites:

WTC basic: 1800 WTC couple: 1770 WTC 30 hour element: 735 CTC child element x2: 2085x2 CTC family element: 545

Total 9020.

Then apply the income reduction. Income is pretty much the same as gross income declared for tax purposes, with a few exceptions like maternity pay doesn't count, or the first 300 of saving income. As with tax: pension contributions, gift aid, tax deductable expenses etc can be deducted.

The relevant income for the current tax year is the lower of this tax year's income and last tax year's income, unless this year's income is more than 25k greater than last year's in which case it's this years minus 25k (the "income increase disregard").

This means that you get much more in tax credits if, say, your earnings alternate between 10k and 30k each tax year than if they stay constant at

20k. Something to bear in mind when you have control over your income level, but see below, or when planning your pension contributions.

So if you earned 10k last year and 30k this year, your income for TC purposes is 10k. If you earn 60k the year after that your income for TC purposes will be 35k. If your income alternates between 10k and 30k each year, your income for TC purposes is always 10k!

The income reduction is 39% for income over 6420, except the family (& baby) elements of the CTC remain until income gets above 50k, when it's reduced at

6.67%.

So when combined with tax and NI, the marginal rate is 70% up to about 28k in the example above.

Eg in this example if your income is 10k, then you get 9020 - (10000-6420)*0.39 = 7623.

Note that there's a provision in the rules for "notional income", which the TC people can use if they reckon you've deprived yourself of income in order to increase your tax credits. I'm not sure of the circumstances they use this in. I don't think they can use this for deductions like pension contributions and gift aid etc, but they could probably use it for stuff like shifting expenses, dividends etc from one year to the next, if they believed you did it in order to increase tax credits.

Have you tried typing "tax credit"+calculator into google UK. you'll get several - government and money advice centre calculators.

eg.

Alternatively, make an appointment to see a benefits advsor at your local Citizen's Advice Bureau.

But basically, as you say, it probably should boil down to what are valid tax deductibles for your business purchases/expenses and what net income that leaves for tax credit purposes. One you get info on the first part the credit calcuators should allow you to type info into calculators to calculate benefits under various scenarios.

Toom

That one looks better, it seems to ask the most of the right questions and it gave the right result in my example, though the title "Working Families Tax Credit Estimator" was offputting since the WFTC was a separate system operating completely different rules and was abolished in 2003. It didn't ask about pension contributions/gift aid though...