Complete Guide to UK Tax Credits: How to Claim and Maximise Savings
Tax credits are a vital tool for reducing your tax liability, offering significant financial relief for individuals and businesses alike. Unlike deductions or allowances, tax credits directly lower the amount of tax you owe, making them one of the most efficient ways to reduce your tax burden. This guide will explain how tax credits work, how they differ from other tax benefits, who qualifies, and how to claim them effectively.
What Are Tax Credits?
Tax credits are government incentives designed to reduce a taxpayer’s overall tax liability. Unlike tax deductions, which reduce taxable income, tax credits directly lower the tax owed. For instance, if you owe £1,000 and have a £200 tax credit, you’ll only pay £800.
Types of Tax Credits
Refundable Tax Credits: These can reduce your tax liability below zero, resulting in a cash refund.
Non-Refundable Tax Credits: These can reduce your tax liability to zero but cannot generate a refund.
How Do Tax Credits Differ from Other Tax Benefits?
Tax Credit
Description: Spending more than 183 days in the UK generally makes you a resident, subjecting you to taxes on worldwide income.
Example: Marriage Allowance, R&D Tax Credit
Tax Relief
Description: Lowers tax owed based on specific expenses or contributions.
Example: Pension contributions, charitable donations
Tax Deduction
Description: Reduces taxable income, lowering the amount of income subject to tax.
Example: Work Expenses
Tax Allowance
Description: Provides a tax-free threshold before any tax is owed.
Example: Personal Allowance (£12,570 in 2024/25)
Examples of Tax Credits
Non-Refundable Tax Credits
Marriage Allowance
Tax Credits on Dividends
Foreign Tax Credit
Film and Creative Industry Tax Reliefs (for companies)
Enterprise Investment Scheme (EIS)
Seed Enterprise Investment Scheme (SEIS)
Venture Capital Trust (VCT)
Social Investment Tax Relief (SITR)
Refundable Tax Credits
Research and Development (R&D) Tax Credit (SME Scheme)
R&D Expenditure Credit (RDEC) for Large Companies
Historical Credits: Working Tax Credit, Child Tax Credit
Statutory Maternity Pay (SMP) Reimbursement for Employers
VAT Refunds under Special Circumstances
Note: Universal Credit has replaced many refundable tax credits and is now treated as a benefit.
How to Claim Tax Credits
Eligibility depends on the specific credit. Below are some common examples:
Marriage Allowance
One partner earns less than the Personal Allowance (£12,570).
The other partner pays tax at the basic rate (income £12,571–£50,270).
R&D Tax Credit
SMEs conducting qualifying R&D activities.
Large companies claim under the RDEC scheme.
Foreign Tax Credit
Income or gains taxed abroad and in the UK.
Universal Credit
Low-income individuals or those unemployed.
Must meet savings and working hours criteria.
Additional Considerations
Claiming for Previous Tax Years
HMRC allows retrospective claims for up to four tax years. For example, in 2024/25, you can claim back to 2020/21.
Overpayments
If you’ve received tax credits you’re not entitled to, notify HMRC immediately to avoid penalties. If the error was HMRC’s fault, repayment might be waived.
Moving Abroad
Marriage Allowance: May still apply if one partner remains a UK taxpayer.
Universal Credit: Typically stops unless the absence is temporary.
Foreign Tax Credit: This can still be claimed to prevent double taxation.
Creative Industry Tax Reliefs and R&D Credits: These depend on the business continuing to operate and pay UK Corporation Tax.
How Does HMRC Verify Tax Credit Claims?
HMRC uses automated checks, manual reviews, and random spot checks to ensure compliance. Common red flags include:
Income discrepancies
Unusual or high claims
Late or inconsistent information
Frequent errors
Conclusion
Tax credits are a powerful tool to reduce your tax liability, whether you’re an individual or a business. Understanding how they work, who qualifies, and how to claim them ensures you maximise your entitlement.
At Bambridge Accountants, we specialise in international and cross-border tax matters, helping individuals navigate complex rules around UK and US tax. For tailored advice on managing cross-border tax issues, book a call with us.