Not illegal, but probably unethical?

Dithering_Dad

Lotus-eater wrote: »

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.

I would have thought the opposite would be true. If a customer goes bust and you have no reserves in your company, then you may also go bust. If you have a lot of money in the company, then you can ride out a customer going bust and still be able to pay yourself a living wage and pay your other company liabilities. Seems crazy to be depleting a company of its reserves in times like these?

As far as the tax credits, you do have to repay them if you're overpaid.

Lotus-eater

Dithering_Dad wrote: »

I would have thought the opposite would be true. If a customer goes bust and you have no reserves in your company, then you may also go bust. If you have a lot of money in the company, then you can ride out a customer going bust and still be able to pay yourself a living wage and pay your other company liabilities. Seems crazy to be depleting a company of its reserves in times like these?

As far as the tax credits, you do have to repay them if you're overpaid.

Ahh, yes but I wasn't talking about being overpaid.
If I earn a small amount one year and get a wheelbarrow full of tax credits, then the next year they assume I am going to be getting the same amount of income, even if I don't, I still receive the full barrow full of credits...... and I don't have to pay them back.

Personally, on your first point, it depends how much we are talking about. If I have £50k saved in a business and a customer goes down owing me £40k, I have just lost £40k of essentially my own money, quite a hit. But as you say you can weather the storm and ride again.
However, if I have £2k in my business and a customer goes down owing me £40k, I can go into administration, owe nothing and start another business up the same afternoon, with all the same customers (apart from one obviously ) and be £40k better off.

edit, hang on thats not quite right, obviously you will have to owe money as well.

Dithering_Dad

Lotus-eater wrote: »

Ahh, yes but I wasn't talking about being overpaid.
If I earn a small amount one year and get a wheelbarrow full of tax credits, then the next year they assume I am going to be getting the same amount of income, even if I don't, I still receive the full barrow full of credits...... and I don't have to pay them back.

Personally, on your first point, it depends how much we are talking about. If I have £50k saved in a business and a customer goes down owing me £40k, I have just lost £40k of essentially my own money, quite a hit. But as you say you can weather the storm and ride again.
However, if I have £2k in my business and a customer goes down owing me £40k, I can go into administration, owe nothing and start another business up the same afternoon, with all the same customers (apart from one obviously ) and be £40k better off.

edit, hang on thats not quite right, obviously you will have to owe money as well.

I was about to say that your statement doesn't make sense until you added the edit.

With my business, I have no outlay for stock. I supply business and technical knowledge to my clients and they pay for this. If my client went broke, I would just not get paid for a month's worth of work. If my company reserves were low and I was depending on the income for that lost month, then I'd have put myself in a precarious financial position. If I have £50k of reserves in my company, the loss of that month's earning would be painful but not a disaster.

This is pretty much the reason that I'm thinking of paying myself much less over the next couple of years or so and filling up my company coffers.

With the tax credits. If you paid yourself a lot less one year, then the followingyear's tax credits would be based on that level of income. The following year's tax credits would then be based on your higher level of income, so it would be reduced accordingly.

Lotus-eater

Dithering_Dad wrote: »

With the tax credits. If you paid yourself a lot less one year, then the followingyear's tax credits would be based on that level of income. The following year's tax credits would then be based on your higher level of income, so it would be reduced accordingly.

Unless they have changed it then you are incorrect I'm afraid. Three years ago we got paid in exactly the way I described and ended up with quite a lot of money in the bank.

Conrad

DD I vastly decreased my Tax liability by notionally lending £100,000 to my ltd co. My Accountant set it all up and pre agreed it with the IR. The releif was offset over a period of years.

No way I'd put it a pension plan apart from my own SIPP, and even then I'd think twice. Remember in a non SIPP pension if you die 1 day into retirment your family get £0 back. The fact you can arrange life cover is niether here nor there in this context.

Dithering_Dad

Conrad wrote: »

DD I vastly decreased my Tax liability by notionally lending £100,000 to my ltd co. My Accountant set it all up and pre agreed it with the IR. The releif was offset over a period of years.

No way I'd put it a pension plan apart from my own SIPP, and even then I'd think twice. Remember in a non SIPP pension if you die 1 day into retirment your family get £0 back. The fact you can arrange life cover is niether here nor there in this context.

That's the same in any pension including a SIPP, if you use your pension to buy an annuity. Once the annuity is bought, the money goes to the life company and you get a pension. If you set the annuity up to pay a widow's pension of 100%, 50% or 33% or whatever, then your OH would get that amount until she died and then the money dies with her.

If you use income drawdown, which you can do upto age 75 then if you die, your dependants can keep the money.

I guess it depends on what you think a pension is for. If it is to provide yourself with a secure income when you're retired, that involves no hassle, no worry and pays a set, guaranteed amount then choose an annuity.

If a pension is to further feather the nest for your kids, but at the expense of having a secure, guaranteed income with no hassle or worry, then you should go for an income drawdown or ISA savings.

I have a while yet to go until retirement, but I am sure that when I reach 65 (or whatever the age is), I will have had enough of work and worry and will be looking forward to a nice relaxing retirement. I'll be choosing an annuity because that is proven to be the the method that gives you the best retirement income and because I will have funded my kids through a goodchildhood, paid them thru university and they will hopefully have their own decent incomes and won't be looking for (yet another) handout from Mum and Dad.

silvercar

For a couple of years I kept the dividends at the level where I didn't have extra tax to pay. It does mean that the money builds up in the company. This is fine as I don't need it for income, but at some point you have to bite the bullet, take the tax hit and take the money, otherwise what do you do with it - retirement is 15-20 years away. So I paid the tax, took the money and moved house - half of it has probably disappeared in HPC!

Dithering_Dad

silvercar wrote: »

For a couple of years I kept the dividends at the level where I didn't have extra tax to pay. It does mean that the money builds up in the company. This is fine as I don't need it for income, but at some point you have to bite the bullet, take the tax hit and take the money, otherwise what do you do with it - retirement is 15-20 years away. So I paid the tax, took the money and moved house - half of it has probably disappeared in HPC!

The reason I am looking into this is to build up money for economic downturns. If I can't find work then my company will keep me financially until I do. If I do keep finding work then I guess I have the choice of taking the surplus out as a dividend, making large employer contributions to a pension scheme or to close down this particular company and pay myself the surplus as a capital gain. I believe that you can have upto £8k tax free as a cap gain?

silvercar

CGT allowance is £9,600 at the moment. Not sure of the workings of closing down the company, you may even be able to pay yourself £30k tax free redundancy payment.

Dithering_Dad

silvercar wrote: »

CGT allowance is £9,600 at the moment. Not sure of the workings of closing down the company, you may even be able to pay yourself £30k tax free redundancy payment.

Can director make themselves redundant? That might be a scam too far, even for me.

My main aim was to look at ways to survive a downturn with my company intact. I think paying myself upto the high rate tax threshold and 'cutting my cloth' with the family finances shoudl be adequate. As far as the tax credits are concerned, it hardly seems worthwhile filling in all the forms for the sake of £500.

I posted the dividend calculation on the link that michaels posted at the top of this page. I got a right roasting off a coupel of regulars on that board. I won't be going back on the benefits board again! Jeez!:eek: