Can A Limited Company Director Claim Tax Credits

p4dstar

I am currently self employed and we claim Tax credits. Next financial year we plan to become a limited company with myself and my wife as directors. I have found lots of contradicting stories on the internet but my question is this... If me and my wife take a salary and a set amount of dividends from the limited company and leave the rest of the money in the business account can we claim tax credits.

To give an example;
Business makes £1M profit (I doubt I would be worrying about Tax credits haha)
My Wage: £15k
Wife's wage: £10K
Dividends: £2k each.
Would tax credits accept a claim based on our income as if we worked a standard PAYE job or does it get complicated with them taking into account the company accounts and what the company has made?

zagfles

If you're deliberately taking a low income or less than you could, notional income rules may come into play. See https://www.gov.uk/hmrc-internal-manuals/tax-credits-technical-manual/tctm04800

p4dstar

Ah I get you. I also completely understand the jump to a skeptical view on this subject. That is not our intention, we have just been stung very heavily by TC in the past.

In 2011 they claimed my wife didn't give them new childcare details. As they were paying for a previous provider she needed to pay that money back and as she had not told them of the change within 30 days she was not entitled to any of the childcare element. At this point she was a single parent with two children working part time. Next we got together and again six months in they claimed we had not told them of the changes. That was done during the change of address conversation. The following year my company changed the pay structure and paid me 14 times in a year. Even though my salary didn't change it meant we exceeded the threshold for TC at the time. This was followed by claims we didn't tell them of overtime.

The above resulted in a total debt of £7500. We complained and tried to provide evidence of the phone calls but there seems to be no complaint procedure. Letters are not responded to and managers are never available. My local MP didn't respond (Conservative and in government at the time) but argued with my wife on the door that we didn't contact him while out canvassing.

This all left us feeling rather lost. We stopped claiming and struggled through from 2014. We started the company in 2017 and decided to claim again last year. We are being really careful to ensure we have everything completely up to date with them. It is difficult as a sole trader but I figured as a limited company taking a wage we couldn't go wrong. In short, it's more about ease of declaring income than disposing of income in order to claim TC.

zagfles

p4dstar wrote: »

Ah I get you. I also completely understand the jump to a skeptical view on this subject. That is not our intention, we have just been stung very heavily by TC in the past.

Well you did give the example of £1M profit and paying yourselves about minimum wage! That's definitely looking for trouble

But I don't think this would be a solution to the problem of overpayments and getting into debt with tax credits. With a variable income it will always happen, and often can't be avoided even if you keep them fully up to date with any changes in your income and even if HMRC act on it immediately. It's the design of the system, blame Gordon Brown!

It'd be best if you gave them an estimate, then if if looks like you're going to exceed the estimate, put most of the extra money aside to pay back the excess tax credits. After all it'd be money you weren't expecting if it is higher than your estimate.

Either that or understand how the system works so you can work out what your overpayment will be so it's not a shock.

p4dstar

Yeah millions would be a stretch I think

You need some sort of a degree in order to understand the TC system, you can tell it was designed by a politician because it makes absolutely no logical sense. Take the time I mention being paid 14 times in a year for example... We had 2 children and at the time you could claim if your joint income was under 32K. I was paid an extra £1750 and they took back TC totalling over £2k.... They took back more than the difference.

We struggled through for a couple of years, worked hard and eventually it didn't bother us any more. We paid them back at £100 a month until last January. After completing my 2017-18 tax return I realised we would have been entitled to quite a bit and had missed out. I called and changed the details over and have used every penny they have paid us to pay them back, the rest is in a savings account besides a small amount we absolutely had to spend. Even if they tell us we need to pay every single penny back it's either in the savings account or been paid to them so not really cost us anything.

zagfles

Tax credits aren't that hard to calculate. You just need to understand the foibles, like they are calculated on a combination of previous year and current year income.

They use previous year's income if current year income is within £2500 of previous year, otherwise they use current year ignoring the first £2500 rise or fall.

Eg if PY was £20,000, then if CY is £17,500-22,500 they'll use PY. If CY is 26,000 they'l use 23,500, if CY is £14,000 they'll use £16,500.

Once you've got your head round that, and that they use annual taxable income (mostly - a few minor foibles there, like some maternity pay can be ignored, and £300 of dividends/interest etc),

Then add the elements you're entitled to, see here https://www.gov.uk/government/publications/rates-and-allowances-tax-credits-child-benefit-and-guardians-allowance/tax-credits-child-benefit-and-guardians-allowance

and take of 41% of your income above the threshold.

So example: if you're a couple with 2 kids, no childcare working 30+ hours and PY income was £20,000 and CY is £27,000.

Tax credits will use £24,500 as your income.

Elements you're entitled to: Basic+couple+30h+family+2xchild = 1960+2010+810+545+2x2780 = 10885.

Reduced by 41% of income over £6420 ie (24,500-6420)x0.41 = 7412.80.

So you get 10885-7412.80 = 3472.20


Problems usually occur because the design, particularly the annual assessment, means that if your income changes significantly, you could already have been paid too much in the tax year so there's an overpayment that can't be put right by adjusting future payments. But if you understand this you can account for it in your spending/saving.