As you’ve made the transition towards becoming an independent contractor, you may have heard the suggestion of applying for working tax credits from any number of well-meaning friends or family members. Although it sounds like it isn’t worth the hassle, even making just a ‘protective claim’ can have serious benefits for you and contractors like you, making sure personal finances stay afloat between contracts.
What Are Working Tax Credits?
Working tax credits are a means-tested benefit designed to help individuals in employment, but earning under a certain threshold, or those with children. Individuals eligible for the tax credits receive a monthly payment to add to their income. In the case of contractors, a protective claim is most often made, meaning that no payments will be made until their income drops below a certain amount i.e. between contracts.
How Can They Help Contractors?
In the early days of becoming an independent contractor, you may find that your personal finances suffer – after all, you can’t always afford to pay yourself a decent wage. There’s also the matter of quiet periods, where contracts are few and far between, or a larger contract hasn’t started yet. In all of these situations, working tax credits can help to give your personal finances a boost and allow you to support yourself through rough patches and the early days. Instantly, this is a worry off your mind, and prevents contractors from developing a dislike for their newfound lifestyle early on.
How Much Can I Claim?
This is the tricky part. Due to HMRC’s closely guarded and complex formulas, it’s extremely difficult for a contractor to work out how much they’re likely to be paid. The basic amount of working tax credit is up to £1960 a year, but your claim could be higher or lower than this.
Where Do I Begin?
The first step is checking your eligibility: you must be over 25, working at least 16 hours a week and be earning under HMRC’s threshold – which they don’t easily divulge. Talk to your accountant about making a protective claim to begin with, and find out how much you earned during the previous year, as all claims are based on the last tax year’s results.
Things to Remember
It’s important to keep in mind four things:
- To claim, you must be over 25 (or under 25 with a child) and working 16 hours a week, minimum.
- You must report any changes in circumstances to HMRC, or face ‘claw backs’ – which are every bit as financially unpleasant as they sound.
- Working tax credits are tax free, but are always means tested – and it’s best to let HMRC work out how much you’re eligible for, as the formula is a notably complicated affair.
- There is legislation in place to keep contractors from massaging funds in order to pay themselves less in order to be eligible – don’t attempt this, as HMRC have wised up to the practice and have the law on their side.
Need some help making the first move towards claiming tax credits? Get in touch with Gorilla Accounting for expert advice and assistance.
