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Is this how Tax Credits work?

(54 Posts)
zazas Fri 10-May-13 19:25:44

So my friend has a one year old does not want to go back to work. Her husband who is self employed does not earn a huge amount averaging about £900 a month but by claiming tax credits etc (they have 2 children) and with his income low they are entitled to nearly £700.00 a month in tax credits etc - £1700 with child benefit. As she says it makes no sense to go back to work part time and pay childcare or her husband to work harder when they can earn this which they can live on. They always take a month off in summer to camp in Europe and probably another 4 weeks in holidays spread throughout the year and this 'helps' to keep his income low.

If that is the case why don't more people (or do they) do this rather than work to earn just a tiny bit more? Or am I missing something here?

ihearsounds Fri 10-May-13 19:32:28

1700 a month is that combined tax credits, child benefit and wages?

lougle Fri 10-May-13 19:37:05

Is there a disability in the family?

coribells Fri 10-May-13 19:37:23

That doesn't sound right to me. I earn just over £1000.00 a month and pay childcare . I get around £450 per month in tax credits for two children .

There's no way she could be getting £1700 in tax credits and child benefit, especially if she only has one child. CB is only about £80 per month for one child. I've just put that information through the entitled to website and according to that she'd get around £590 per month in tax credits and child benefit.

Fairylea Fri 10-May-13 19:40:32

Well for us.... dh is on 15k, we have two dc one of which is under 1 and we get £140 a week tax credits and then £134 a month child benefit.

zazas Fri 10-May-13 19:42:58

No I am sorry I meant that with his income PLUS benefits it was around £1700 - nearly £700 in tax credits and £134 child benefit.

lougle Fri 10-May-13 19:43:22

I've just run it through the benefits checker at turn2us. That's about right.

People may decide not to return to work if the benefit to them is less than the cost.

The marginal rate of deductions comes close to 95% once all benefits are factored in.

For instance, my DH has just taken on an extra 5 hours at work each week. He earns an above NMW wage. He still only receives £1.63 (NET) for that extra 5 hours after all the deductions to benefits. He's happy to do it because he wants to work more, but financially it isn't worth it.

zazas Fri 10-May-13 19:45:07

So why does it work in such a way that it makes it financially better not to work that to work? Surely the benefits are there to help those with real need?

Tax credits were not introduced as a "benefit."

Its this government that is demonising anyone who needs state help, but is doing nothing about the high cost of living.

Fairylea Fri 10-May-13 19:58:55

If basic salaries were in line with the cost of living then we wouldn't need tax credits at all. But they're not.

zazas Fri 10-May-13 20:01:27

I can totally understand and support the need when basic salaries are not in-line with cost of living but what about for self employed people who choose to keep their income low in order to claim higher tax benefits? I am curious as to why this OK?

Chubfuddler Fri 10-May-13 20:04:00

Which self employed people deliberately keep their earnings low to receive tax credits? I don't believe anyone does this.

Even if your friend went back to work part time, would it be enough to live on?

If she worked full time, would it cover childcare costs?

Its all well and good asking why people choose not to work, but you have to understand that a familys priority is keeping a roof over their head and feeding themselves. And until wages are in line with living costs its going to take some state assistance to make that possible.

lougle Fri 10-May-13 20:07:10

It doesn't make it better not to work.

Anyone claiming tax credits will always be better off in work than out of work. See my example above: DH is £1.63 per week better off by taking the extra 5 hours.

It's just that, for people with such low income as to qualify for housing benefit and council tax benefit, by the time the deductions are made, the vast majority of the increased earnings are wiped out.

Having said that, if you look at it from an independence/self-esteem point of view, we are less dependent on benefits if we take those 5 hours than if we don't...

zazas Fri 10-May-13 20:09:38

But it makes sense to - that is what my friend has worked out. Figured out what her DH needs to earn a year plus credits to live on. Then they work out that some months they can earn double and then not earn anything and go away for a month. I can see the logic for them. Maybe that is unusual? I've not heard of anyone else actually!!!

Fairylea Fri 10-May-13 20:12:32

I don't know about the whole self employed thing but I do know that we worked out that if I returned to work in a part time minimum wage job we'd be better off by £20 a week that I'd end up spending on the petrol to get into work!! (And I'd have to drive as we live rurally and no public transport).

So we have made the decision to manage on dh's wage and tax credits until ds starts school as childcare will be cheaper.

It's not an easy clear cut decision and you can't blame people not wanting to work when there is no financial incentive to do so. Especially as they are also changing the childcare ratios and there are no good nurseries in my area (we visited two and made a complaint about one to ofsted). There is one childminder and she is fully booked.

When I had dd ten years ago I returned to work full time when she was 6 months old but our situation and area we live in is different now.

We don't have a life of luxury. I constantly penny watch.

zazas Fri 10-May-13 20:12:50

wannabedomesticgoddess actually she left a relatively well paid job and childcare costs where we live are not too high. My point really is that her DH business is not viable (demand not there) but it is OK to keep doing it if they can get credits.

Well its still better for him to earn £900 per month and pay tax and NI than claim JSA. Surely?

Fairylea Fri 10-May-13 20:20:28

Also if he earns loads and then has nothing for a while or back to "normal" their tax credits will be totally screwed up surely as they will have had to over estimate so will need to pay money back? So maybe they just keep work steady so they know that they have what they are entitled to?

I was self employed for a while and I had to guess my income and tax credits was based on that so maybe they just want to err on the side of caution so they aren't overpaid ?

Chubfuddler Fri 10-May-13 20:22:35

If he's earning 900 a month it's perfectly viable. HMRC are quite wise to pretend self employment situations were people claim to be self employed to claim tax credits rather than JSA.

If she were working too they would probably still be entitled to tax credits - just as much probably by the time childcare costs were factored in.

Perhaps you need a hobby that doesn't involve speculating about your "friend" and her financial situation.

JakeBullet Fri 10-May-13 20:31:58

I used to take home £950 a month in work. My tax credits were about £450 with WTC but included a disability element as DS is autistic. I also got CB of £80 a month. I only have one child so £700+ in tax credits for two non-disabled children sounds huge.

Cantbelieveitsnotbutter Fri 10-May-13 20:48:18

The problem with self employed tax credits, is they do it on the previous years profit. So say last years were rubbish as he bought new equipment, this year new equipments all paid up so the profits profit (but kept in the company not in their pocket) then tax credit next year adjust accordingly, they can and do stop the payments to pay off the 'over payment'. They can also ask you to pluck it out your arse pay it back. Which given that the profit stays in the company as its needed, and you've lost the tax credit payments your then trying to find it from somewhere.

What I'm trying to explain (if any of that makes sense!) is its not a regular reliable 'income' especially if your self employed

lougle Fri 10-May-13 21:01:13

I don't call £900 per month not viable hmm Many people earn less than that in a month - is their work not viable?

zazas Fri 10-May-13 21:17:20

Chubfuddler - I'm not 'speculating about your "friend" and her financial situation" - we were discussing it together tonight and she too wonders why she would choose work over tax credits - we are both slightly perplexed how it works!

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