Close company shareholder eligibility for in-work tax credit

In the past, in order for a principal caregiver to receive an in-work tax credit there was a requirement for the person to be a full-time earner receiving income from a work activity such as salary, wages, or a shareholder-employee salary.

However, legislation passed last year has changed this. Assuming other requirements are met to qualify for the in-work tax credit, a person no longer has to receive “income from a work activity”. Rather, the person will now qualify if they are a major shareholder in a close company in which they are a full-time earner, and the company derives gross income in the income year.

This change resolved a common problem that arose when shareholder employees did not draw a salary from ‘their company’. Because they weren’t receiving income from the company, they were not entitled to the in-work tax credit even though they were working actively in the business.

Going forward, the company’s income (or a proportion of it depending on the number of the person’s shares in the company) is taken into account to calculate the amount of the credit.

This change has retrospective effect from 1 April 2011.

Published Summer 2013.

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