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
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.
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.
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.