Dividend Planning for Tax Credits

It is sometimes suggested that Child and Working Tax Credit awards can be maximised if the family's income is low in one year and high in the next year. The Tax Credit award for the first low year is substantial, and the award is not changed for the second year if the income increase is within £25,000 of the total income for the first year. However, note that this 'income disregard' of £25,000 is being reduced to £10,000 from April 2011.

This 'lumpy' income pattern can be achieved if you run your own company and take dividends from that company only every other tax year. In practice there are a number of difficulties as follows:

• Your family may need the cash. If income is not taken as dividends, it will need to be extracted in another form.
• If you take a loan from your company this can create tax charges for you and your company.
• If you deliberately deprive yourself of income to increase a Tax Credit award you can be deemed to receive that income in the appropriate tax year.

So please talk to us before varying your income for tax credit purposes.