Self Employment and Drawings

spilledink

Is there a set amount that I have to pay myself as self employed?

Does this have any impact on claiming Tax Credits?

I'm asking as a sole trader, (hopefully) entitled to disability tax credits. I work around 20 hours a week.

Just want to check, because I'm not sure how often or much I can pay myself. Already asked in the benefits forum, but it's very busy and no real answer yet.

Pennywise

No, you can draw whatever you like, when you like, all subject to the business cash flow etc.

However, if you're claiming benefits, there are rules to prevent abuse which are different for the different types of benefit.

In particular, a new rule has been introduced for tax credits (not sure whether it's in force yet) which means that regardless of your actual drawings, you are "deemed" to pay yourself at least the national minimum wage for the hours you claim to work - your tax credits are based on that amount even if your drawings are less.

Such anti-abuse rules are needed because some people set up "artificial" self employments and "pretend" to work the requisite number of hours, in order to be eligible for the likes of working tax credits etc. I've had clients who've done exactly this, i.e. set up a market or car boot stall, or rent a cheap small shop, or set up on e-bay, or start a home cleaning or gardening "business", with no real intention of making a go of it, but just doing the bare minimum to get tax credits, year in - year out, with no business growth etc.

A couple of years ago, the tax credit enforcement sections started to clamp down by requiring "proof" of the number of hours worked in the business. And as I say, the latest change is that minimum wage is deemed to be paid for the hours worked.

If you've got a "real" business, are properly working the hours you declare, and intend to live off the business in the long term, then I'm sure you'll be fine and will have no problem claiming your benefit entitlements over the short term whilst you need support.

InsideInsurance

spilledink wrote: »

Just want to check, because I'm not sure how often or much I can pay myself. Already asked in the benefits forum, but it's very busy and no real answer yet.

If you are a sole trader then you don't "pay yourself" as there is no "company" and so all the money is yours automatically just for convenience (or to comply with with bank account T&Cs) you may choose to have a separate bank account.

If you were to form a limited company then the matter is different because the revenues are the companies money and you then draw down either as salary or dividends.

100% of your profit counts as your income as a sole trader and this is used in the calculations for any means tested benefits

BigAunty

Ask on the benefit forum. There was a thread on there recently where a poster is adamant that it is possible for a director of a limited company to pay themselves the minimum that they like and keep the balance in their business bank account for the period in which they are due tax credits in order to maximise them, something not available to a sole trader. I'm surprised WTC could work that way, allowing someone to build up a huge nest egg ready for when they sign off but this poster insisted this is the case, that there is a big loophole in tax credits which doesn't work with other means tested/income based benefits like housing benefit,etc.

In the move to the Universal Credit system, there is an emphasis on an established business making at least the NMW, a notional income, but it's not clear how this will work in practice. There is talk that all it may require additional conditionality on the part of a low income self employed person, such as signing on like JSA to find a part time job. Perhaps this is what the previous poster is talking about? I'm not sure because perhaps there are now new rules within tax credits. Certainly under UC, tax credits will be scrapped so it is probably worth your while finding the DWP proposal paper on it.

EDIT - sorry, I see that you've asked in the benefits thread - bump the thread if it's not moving.

podperson

As above, if you are a sole trader then the profit made by the company is considered as your 'wage'. Drawings only apply to a limited company where you would be a director and therefore could pay yourself a set wage from the company money.

heretolearn_2

Hi

Just wanted to point out that the last poster has got it back to front.

The money sole traders take out for themselves is called 'drawings'.

Directors of Ltd companies do not take drawings.

OP, just to be sure you are aware, something a lot of new sole traders get confused about is they think that their drawings are a sort of 'salary' and so are a business expense. So try to take that off their profit and only pay tax on what is left. Be nice if it worked that way! Basically you have your profit for the year - income minus expenses, you pay tax on your profit, and what is left is yours. Your drawings are coming out of the 'what is left' bit.

CKhalvashi

BigAunty wrote: »

Ask on the benefit forum. There was a thread on there recently where a poster is adamant that it is possible for a director of a limited company to pay themselves the minimum that they like and keep the balance in their business bank account for the period in which they are due tax credits in order to maximise them, something not available to a sole trader. I'm surprised WTC could work that way, allowing someone to build up a huge nest egg ready for when they sign off but this poster insisted this is the case, that there is a big loophole in tax credits which doesn't work with other means tested/income based benefits like housing benefit,etc.

In the move to the Universal Credit system, there is an emphasis on an established business making at least the NMW, a notional income, but it's not clear how this will work in practice. There is talk that all it may require additional conditionality on the part of a low income self employed person, such as signing on like JSA to find a part time job. Perhaps this is what the previous poster is talking about? I'm not sure because perhaps there are now new rules within tax credits. Certainly under UC, tax credits will be scrapped so it is probably worth your while finding the DWP proposal paper on it.

EDIT - sorry, I see that you've asked in the benefits thread - bump the thread if it's not moving.

This works the same way for HB/CTB, too. There are also ways of 'selling' companies to a Holdings company to trigger a large (£100k+) 10% tax liability. We did this both with the UK holdings company 6 years ago, then with the ultimate European holdings company last year. Consult an accountant before going Ltd for this reason.

heretolearn wrote: »

Hi

Just wanted to point out that the last poster has got it back to front.

The money sole traders take out for themselves is called 'drawings'.

Directors of Ltd companies do not take drawings.

OP, just to be sure you are aware, something a lot of new sole traders get confused about is they think that their drawings are a sort of 'salary' and so are a business expense. So try to take that off their profit and only pay tax on what is left. Be nice if it worked that way! Basically you have your profit for the year - income minus expenses, you pay tax on your profit, and what is left is yours. Your drawings are coming out of the 'what is left' bit.

Directors of Ltd companies earn part of their income (£8105 being most beneficial) through PAYE, then take the rest through dividends. Taking £8105 salary, then the next £50k into a pension scheme, then dividends with anything left is generally most tax efficient, but as a Sole Trader, you don't have this option.

See above for further info on how best to do this.

CK

[Deleted User]

Pennywise wrote: »

No, you can draw whatever you like, when you like, all subject to the business cash flow etc.

However, if you're claiming benefits, there are rules to prevent abuse which are different for the different types of benefit.

In particular, a new rule has been introduced for tax credits (not sure whether it's in force yet) which means that regardless of your actual drawings, you are "deemed" to pay yourself at least the national minimum wage for the hours you claim to work - your tax credits are based on that amount even if your drawings are less.

Such anti-abuse rules are needed because some people set up "artificial" self employments and "pretend" to work the requisite number of hours, in order to be eligible for the likes of working tax credits etc. I've had clients who've done exactly this, i.e. set up a market or car boot stall, or rent a cheap small shop, or set up on e-bay, or start a home cleaning or gardening "business", with no real intention of making a go of it, but just doing the bare minimum to get tax credits, year in - year out, with no business growth etc.

A couple of years ago, the tax credit enforcement sections started to clamp down by requiring "proof" of the number of hours worked in the business. And as I say, the latest change is that minimum wage is deemed to be paid for the hours worked.

If you've got a "real" business, are properly working the hours you declare, and intend to live off the business in the long term, then I'm sure you'll be fine and will have no problem claiming your benefit entitlements over the short term whilst you need support.

OP, I think you have had the responses that you need, but this point is really interesting to me and I am sure many others.

Can you point me in the right direction of the new rules please "pennywise".

I wasn't aware of this change, although we don't do this just for the benefit of ourselves, it's something that may harm our current status. I'd like to check it out and understand what's changed and to what extent.

Thanks

spilledink

Thank you everyone for your responses, that clarifies a lot.

For those who need more info: I've also found more information about Universal Credit and self employment on the Disability Rights UK website. It's relevant to everyone claiming UC.

Here's another link to DWP's website for more info on UC.

It looks as though the self-employed must pay themselves NMW after being moved onto UC, or else sign on at the Jobcentre (depending on individual circumstances). Universal Credit will be launched in 2013.