Interaction between tax credits and tax planning

Produced by Tolley
Interaction between tax credits and tax planning

The following Personal Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Interaction between tax credits and tax planning
  • Migration of tax credits to Universal Credit
  • Considerations for the adviser in respect of tax credits
  • Capital purchases
  • Pension contributions
  • Trading losses
  • Employing a spouse
  • Incorporation
  • Overlap profits
  • Starting a business

Migration of tax credits to Universal Credit

New claims for tax credits are no longer possible as they have been replaced by the universal credit for all claimants except those entitled to severe disability premium. Existing claimants will continue to receive tax credits until they are migrated to the universal credit system. Migration will take place when a change in circumstances is reported.

See the Universal credit guidance note.

Considerations for the adviser in respect of tax credits

When tax credits were introduced in April 2003, the tax profession took the view that the tax credits system was something either to be embraced fully or avoided. The thought at the time was that because advisers had claimed the children’s tax credit on clients’ tax returns, there was an implication that they should deal with the clients’ tax credit claims unless this work was specifically excluded from the engagement letter.

The decision was taken by over 98% of advisers to exclude tax credits from the services supplied to clients. Most advisers have a default clause in their engagement letters along the lines of ‘we do not offer any advice on tax credits’.

With tax credits now being migrated to the universal credit system, it is an important to note that tax credits have been administered by HMRC whereas the universal credit is administered by the Department of Work and Pensions. If you are already advising clients on their tax credit claims you may wish to review your position as your client's claim is migrated.

Clients who are dealing with their own tax credits claims may potentially be reporting incorrect income figures and missing out on tax credits. In addition, you will have possibly carried out planning for your clients to mitigate their income tax liabilities, which could have had an effect on their tax credit entitlement without you realising it.

It is therefore essential that in deciding on various issues from a tax perspective, you also take into account your clients’ tax credit

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