Tax credit problems

Jeremy Tauri.

Something funny happens when you have kids. Although the new addition to your house is not even a 10th of your size, your bank account starts to drop at about 10 times its usual rate.

It makes sense, then, that families want to qualify for all the help they can get. There's paid parental leave or the in-work tax credit, and Working for Families. But it's the latter that I've seen cause some problems.

Working for Families tax credits are calculated on the basis of household income and the number of children a family has. But for self-employed people who have to forecast their income for the coming year, or those whose circumstances change through the year, it can be problematic.

I have dealt with people who have got seriously into debt because they underestimated their income and were paid more in Working for Families credits than they should have been. They did not realise the mistake and spent the money, then realised that they had to pay it back, including interest and penalties.

Some of the addbacks to your income for the purposes of the calculation not only include income in companies or trusts and business losses, but soft loans from family members.

Circumstances outside of income changes can also change your assessment so if you shack up with someone throughout the year when you were previously living alone this will also reduce your entitlements.

This isn't a pleasant surprise to get, so if you are receiving Working for Families, it is important to make sure that the IRD has the correct information.

Any time your income changes, you need to inform them. If it looks like you might earn more from your business than you had expected, you need to pass that on.

Another option that works well for self-employed people or those with unpredictable income is to be paid Working for Families annually. You do not.

- Jeremy Tauri is an associate at Plus Chartered Accountants