Not illegal, but probably unethical?

shaven-monkey

I'm fairly sure that you can't be a director of a company and receive loans from that company. If this isn't true then it explains a bit more about the bubble.

As for ethics, the tax system is not based on any ethical foundation so your task is to keep as much of your earnings as possible. In the same way as the HMRC will try to take as much of your earnings as they can.

Mary_Hartnell

Nice one DD

wisbech_lad

Neverdespairgirl might have the reference to hand - I think there was a famous legal judgement in the 1920's or 30's where the judge said you have the right to arrange your affairs as you see fit, and if one of the outcomes is that it will reduce tax paid, well there is nothing unethical about it. It is up to the government to set the rules, and if you are willing to live like a pauper for a couple of years to reduce tax paid, that's your choice as a free born englishman. Or something like that.

Plus the company bank deposit won't sit idle, the bank will use it to fund other peoples' mortgages etc.

neverdespairgirl

wisbech_lad wrote: »

Neverdespairgirl might have the reference to hand - I think there was a famous legal judgement in the 1920's or 30's where the judge said you have the right to arrange your affairs as you see fit, and if one of the outcomes is that it will reduce tax paid, well there is nothing unethical about it

Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.

Inland Revenue Commissioners v. Duke of Westminster (1936) 19 TC 490

No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.

Ayrshire Pullman Motor Services and Ritchie v. IRC (1929) 14 TC 754

kennyboy66_2

shaven-monkey wrote: »

I'm fairly sure that you can't be a director of a company and receive loans from that company. If this isn't true then it explains a bit more about the bubble.

As for ethics, the tax system is not based on any ethical foundation so your task is to keep as much of your earnings as possible. In the same way as the HMRC will try to take as much of your earnings as they can.

A limited company can make loans to directors.

They would of course be classed as a taxable benefit (for loans over £5k).

The general disadvantages for normal small limited companies (and I don't mean people who are essentially contractors who set up a Ltd company) are;

1) You are supposed to limit company pension contributions to your 'earnings'.

2) If you leave all you money in a Ltd company and it goes bust (say your biggest customer goes bust owing you a substantial amount & it constitutes a large part of your business). You will then find you have worked several years for nothing.
It sort of defeats part of the purpose of being a Ltd company in the first place.

We will leave the ethics of limited liability to another day.

Dithering_Dad

It doesn't make sense to pay yourself £11k and then not take dividends because the dividends upto the 40% tax threshold (about £34k) are tax free. If someone did just pay themselves the £11k for 5 years, they would have lost out on earning £115k tax free.

To really play the system, a contractor should pay himself £11k in salary then £26k in dividends. He would then only pay tax and NI on the £11k salary - so for an income of £39,888, you'd pay £1601 in tax.

You'd then also qualify for tax credits of £547.50 per annum.

So to recap, income (inl. tax credit): £40435.50
Tax & NI: £1601.00

Total Net Earnings: £38,834.

If you were a normal PAYE person earning £39,888, the sums would be:
Income (inc. tax credits): £40435.50
Tax & NI: £10,230
Total Net Earnings: £28,604.

It really does pay to play the system. :eek:

Sue_S

Lotus-eater wrote: »

As far as I know its not illegal and my accountant did tell me one year of maybe a way to wind up a company and withdraw all the profits without paying any tax, but he was umming and ahhing whether it would work or not.

Yes, i did this a few years ago - wound up the company and made myself redundant with a payout of £25000. Don't know if it's still possible...

Lotus-eater

Dithering_Dad wrote: »

It doesn't make sense to pay yourself £11k and then not take dividends because the dividends upto the 40% tax threshold (about £34k) are tax free. If someone did just pay themselves the £11k for 5 years, they would have lost out on earning £115k tax free.

To really play the system, a contractor should pay himself £11k in salary then £26k in dividends. He would then only pay tax and NI on the £11k salary - so for an income of £39,888, you'd pay £1601 in tax.

You'd then also qualify for tax credits of £547.50 per annum.

So to recap, income (inl. tax credit): £40435.50
Tax & NI: £1601.00

Total Net Earnings: £38,834.

If you were a normal PAYE person earning £39,888, the sums would be:
Income (inc. tax credits): £40435.50
Tax & NI: £10,230
Total Net Earnings: £28,604.

It really does pay to play the system. :eek:

Oh yes, but you would still have a £6k ish corporation tax bill as well.

Dithering_Dad

Lotus-eater wrote: »

Oh yes, but you would still have a £6k ish corporation tax bill as well.

True, but you'd have that anyway whether you paid yourself the dividend or not. The true comparison between PAYE and Contractor should have included the CT, but it makes for more outrage if you leave it out

Lotus-eater

Dithering_Dad wrote: »

True, but you'd have that anyway whether you paid yourself the dividend or not. The true comparison between PAYE and Contractor should have included the CT, but it makes for more outrage if you leave it out

Well, quite......

Going back to your OT for a sec, Kennyboy points out a good item. Leaving all that money in the business could lead, especially in this climate, to a customer going bust and leaving you with nothing.
Another point is that you get very little interest on your savings in a company. If you withdraw the money (up to dividends tax limit ) you can put that money to good use, paying off the mortgage for example and lowering your outgoings, therefore saving money.
Its is a very difficult tightrope to walk and requires complex calculations to see if it works out.

The correct way to do it is as someone else said, boom and bust. Run a small income one year, say up to the lower tax limit? And then a large income the next. Its how the tax credits are worked out, you continue to receive the same amount for the following year. And you don't have to pay it back. The 3rd year you have a small income again and get a large payment from HMG at the end of the year.. and so on.