Does The Tax Credit System Favour The Self Employed?


It emerged yesterday that work program agencies set up in the UK designed to help people get back into work have been encouraging unemployed people to become self employed so the claimant can receive more money in benefits. It’s alleged they’ve even been telling clients that they don’t even have to do any work, they can just say that they’re working. One guy even phoned in to a radio show last night (anonymously of course!) saying that he had been given this advice, so he started up a business which doesn’t make any money just to gain entitlement to working tax credits. What was his business? Playing Poker!

So does the tax credits system favour the self employed?


In some cases entering into self employment will improve your entitlement to benefits but like most things it’s dependant on your circumstances. Tax credit entitlement depends on things like:

  • The number of hours you work per week
  • The number of children you have
  • Your Age
  • Whether you pay childcare costs
  • Whether you’re a single person or a couple

If you fall into a certain bracket on these requirements then becoming self employed may increase the amount of government benefits you receive in comparison to Job seekers allowance or income support, you’ll need to do your research though. There are various online calculators you can use to calculate your entitlement to benefits, it’s essential that you speak to a government benefits advisor to find out where you stand before making any deliberate changes to your circumstances.

Self Employment Vs Employment

Self employed people tend to get a raw deal in many areas of financial life. For instance it can be harder to get a mortgage, loan or any other type of agreement for credit if you’re self employed. You’re also able to borrow less money because the lending figures are calculated on your net profit figures (earnings after expenses) rather than your gross profit. When it comes to tax credit entitlement though this negative aspect of self employment becomes a positive. Tax credit entitlement is also based on your net profit which means that it is calculated once things like motor and other expenses have been deducted from your yearly earnings, because of this you’ll often receive more in tax credits as a self employed person than you would as an employed person.

Working Hours 

We mentioned earlier that people we’re being advised that they could claim tax credits if they weren’t doing any work, is that true? This is a bit of a grey area when it comes to self employment. In employment you’ll usually have set regular working hours that you’re contracted in for, in self employment this is not the case. It’s very difficult to prove or disprove the amount of hours you actually spend working as a self employed person, plus your often on call 24/7. As you receive more money from tax credits if you work over 30 hours a week you may well find that self employment can work in your favour. Be careful though, if you are found not to be working the hours you say you are it could be classed as benefit fraud.

Deferring Earnings

I’ve also heard of people deferring self-employed earnings by asking their employer not to pay commissions they have earned until the next tax year to increase tax credit entitlement. I’m not sure if it’s even legal but I’ve heard it does go on.

If you think self employment may be a sensible option for you and your finances have a look on government websites to check your benefit entitlements and then speak to a government advisor before you proceed.

6 Responses to Does The Tax Credit System Favour The Self Employed?

  1. I don’t know if the tax system benefits us or not. I know here in the States it means we have to pay both sides of the taxes which can take quite a bite out of what you make. But, the benefits for us outweigh any negatives.

  2. Matt says:

    The whole tax credit system is skewed at the moment. It’s ridiculous that it goes off last year’s income with this year’s hours.
    For 2012, after my wife gave up her highly paid job to look after our new son, it basically meant that although she wasn;t working, she wasn’t entitled to anything either because her previous year’s wage was over £30k, despite that loss to our joint earnings. Maybe, I’ll encourage her to set up her own “business”. She doesn;t like poker though…

    • Blackjack? It is a funny system Matt. Your wife going self employed might not be as crazy as it sounds, especially if she’s in a position to do a bit of online work. I know there are big changes planned for tax credits but I’m not sure of the specifics yet, I’ll have to look into it more.

  3. Darren says:

    If you lose your job and are wanting to set up a business (a real one I might add) you’re much better off going for the tax credits as opposed to signing on for JSA.

    At the moment, the standard JSA payment is £72 p/week
    If you work over 30 hours and are single with no children, you get £52 in tax credits.

    It may be less, but there are no ridiculous rules to adhere to like at the job centre. You can genuinely build a business without having to agonise over form filling, or waste time trying to convince the DWP desk suckers you’re not a liar.

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