Tax Credit self employed help

JollyOlly_2

After receiving an overpayment from tax credits i am now totally confused as to what information i should be submitting on my declaration. I work 16 hours a weeek, , my partner is self employed and works at least 40 hours a week, he takes a minimum weekly wage and leaves any profit in the business at the end of the year. We have 3 dependants. Do i give them his weekly wage and self employment profit ? help please!!

Notmyrealname

How the business is set up is extremely important.

If he is operating as a sole trader, his income is the profit from the business regardless of what he pays himself a week. So if his business makes a £20,000 profit but he only pays himself £10,000 out of it, his income for tax credits is £20,000. Conversely, if the business makes a £1000 loss and he pays himself £10,000 his income for tax credits is £0. Please be aware that as a sole trader, his wages ARE NOT a tax deductible expense - only that of someone he employs is.

If he is operating the business as a Ltd Company his income is the wages he pays himself plus any dividends he draws. If his Ltd Company again makes £20,000 but he pays himself £10k in wages and/or dividends, his income for tax credits is £10k. If his Ltd Company makes a loss of £1000 and he pays himself £10,000 his income for tax credit purposes is £10,000.

JollyOlly_2

Thank you for your reply, he is a sole trader, and i have completed my declaration the same way for the last 4 years, but for some reason this year they have taken he wage into account ?? i have even been to citizens advice this morning and they have told me to contact the local tax office !?!

BigAunty

Notmyrealname wrote: »

How the business is set up is extremely important.

...

If he is operating the business as a Ltd Company his income is the wages he pays himself plus any dividends he draws. If his Ltd Company again makes £20,000 but he pays himself £10k in wages and/or dividends, his income for tax credits is £10k. If his Ltd Company makes a loss of £1000 and he pays himself £10,000 his income for tax credit purposes is £10,000.

Could you supply a link about this, please? I've only browsed the HMRC website on self employment but not found this clear distinction between business set-up (sole trader v limited) and the calculation of income. I always assumed it would be a turnover minus expenses = profit calculation.

Rising_Phoenix

Just quickly jumping on the bandwagon - I am part way through the online tax return and have realised that I have mis placed my P11d. Am I able to get a copy of this document?

lovinituk

Notmyrealname wrote: »

Conversely, if the business makes a £1000 loss and he pays himself £10,000 his income for tax credits is £0. Please be aware that as a sole trader, his wages ARE NOT a tax deductible expense - only that of someone he employs is.

I agree with the rest of it but just to be pedantic, how can he pay himself income if the business has made a loss? There would be no many to take as income surely?

lovinituk

BigAunty wrote: »

Could you supply a link about this, please? I've only browsed the HMRC website on self employment but not found this clear distinction between business set-up (sole trader v limited) and the calculation of income. I always assumed it would be a turnover minus expenses = profit calculation.

Yes but for a limited company, turnover minus expenses = profit for the company. This incurs corporation tax at a rate of 20% but has nothing to with the personal income tax of the director(s). The wage paid to staff/directors is a deductible expense for the company.

fawd1

lovinituk wrote: »

I agree with the rest of it but just to be pedantic, how can he pay himself income if the business has made a loss? There would be no many to take as income surely?

The business could make a loss partly due to him taking a salary. For example, and please excuse the very general assumptions here:

Income to business: 15k
Salary taken from business: 10k
Business debts:6k

-1k

Depending on what his business is, he could have a great degree of business debt. Builders for example, quite often have accounts with merchants. So if at the end of the year he has paid himself a salary so high that he cannot pay his costs of running the business, then he will have made a loss.

I would think though that his salary would then be liable for taxation. At least it would be if his books were properly looked at!

lovinituk

fawd1 wrote: »

The business could make a loss partly due to him taking a salary. For example, and please excuse the very general assumptions here:

Income to business: 15k
Salary taken from business: 10k
Business debts:6k

-1k

Not as a sole trader (which is why I only quoted that part of the original post) because salary is not a deductible expense when you are self employed.

So in your example it would actually be...

Income to business: 15k
Business expenses: 6k

Leaving only 9k to draw as salary.

fawd1 wrote: »

I would think though that his salary would then be liable for taxation. At least it would be if his books were properly looked at!

When you are self employed, your profit is your income and is the figure that is used for income tax purposes.

BigAunty

lovinituk wrote: »

Yes but for a limited company, turnover minus expenses = profit for the company. This incurs corporation tax at a rate of 20% but has nothing to with the personal income tax of the director(s). The wage paid to staff/directors is a deductible expense for the company.

This is the thing I am struggling to understand (or misunderstanding) about the way the HMRC treat the self employed for tax credits.

Does this mean a ltd company director can merely leave a large sum of money in the business bank account for the period to maximise tax credits and also have their salary ignored as income? Meaning that they can simply pay themselves a huge dividend in the future when they are no longer eligible for TCs?

lovinituk

BigAunty wrote: »

This is the thing I am struggling to understand (or misunderstanding) about the way the HMRC treat the self employed for tax credits.

Does this mean a ltd company director can merely leave a large sum of money in the business bank account for the period to maximise tax credits and also have their salary ignored as income? Meaning that they can simply pay themselves a huge dividend in the future when they are no longer eligible for TCs?

Technically, yes! Although anything drawn as regular wages is counted as income in the normal and any funds drawn as dividends will already have been taxed at the corporation tax rate and could incur further income tax depending on the individuals overall income at the time of receipt.

Also worth noting that you are no longer self employed once you incorporate your business into a ltd company as you become a director/employee instead.