Directors of LTD companies and tax credits

sez1231

My husband has his own LTD company where he is the only director.  That employees me as a PAYE individual.  It is only us in the company and things have been quite bad over the last few years so consequently we receive child tax credits.  We have 3 children, one of which is disabled so I claim carers allowance also.  Our salaries at the moment are my husband as £719 and myself as £523 a month.  We have reduced the amount of dividens taken as we don't need to claim them as we have the tax credits to live on. 

It seems the tax credits is only based on your salary and the amount of dividens taken which doesn't make sense to me.  You could have a company turning over £100,000s and have a healthy profit but you pay yourself minimal salary and dividens enabling you to claim tax credits?  

I'm potentially going to come of payroll so that we hopefully will start to make a bit of a profit rather than all going on salaties however, that will decrease our income further and therefore increase the benefits from the government?  Surely they have thought of this?  I have asked HMRC that excact question to which they answered as long as you answer the forms correctly.  It will be fine.

I'm still concerned though.  Please can you answer it for me.?

Thankyou

calcotti

As far as I can see dividend income should be declared for Tax Credits within Other Income (there is a £300 disregard).
https://www.gov.uk/guidance/tax-credits-working-out-income

If you have been claiming Tax Credits without declaring dividend income I think you have not completed the forms correctly and you may have been overpaid.

Teahfc

Your husband needs to now pay himself £732 a month rather than £719, that was as of 6th April. I am presuming that is the threshold to keep below PAYE and NI contributions?
What has your accountant said ? 

JessicaF_2

sez1231 said:

My husband has his own LTD company where he is the only director.  That employees me as a PAYE individual.  It is only us in the company and things have been quite bad over the last few years so consequently we receive child tax credits.  We have 3 children, one of which is disabled so I claim carers allowance also.  Our salaries at the moment are my husband as £719 and myself as £523 a month.  We have reduced the amount of dividens taken as we don't need to claim them as we have the tax credits to live on. 

It seems the tax credits is only based on your salary and the amount of dividens taken which doesn't make sense to me.  You could have a company turning over £100,000s and have a healthy profit but you pay yourself minimal salary and dividens enabling you to claim tax credits?  

I'm potentially going to come of payroll so that we hopefully will start to make a bit of a profit rather than all going on salaties however, that will decrease our income further and therefore increase the benefits from the government?  Surely they have thought of this?  I have asked HMRC that excact question to which they answered as long as you answer the forms correctly.  It will be fine.

I'm still concerned though.  Please can you answer it for me.?

Thankyou

If you give up income in order to secure additional tax credits - you could be caught by the notional income rules. See https://www.gov.uk/hmrc-internal-manuals/tax-credits-technical-manual/tctm04803 
It depends really whether there are sound business reasons for your actions or whether you are just doing it to get more tax credits. 

sez1231

No, I purely would be doing it so the business can make a slight profit so we can do things like get a web site done etc.  Do you see my point though you could be a director of a really successful business turning over millions but you don't take any dividens, therefore can claim tax credits?  It doesn't make sense to me like I said surely they have thought of that?

JessicaF_2

sez1231 said:

No, I purely would be doing it so the business can make a slight profit so we can do things like get a web site done etc.  Do you see my point though you could be a director of a really successful business turning over millions but you don't take any dividens, therefore can claim tax credits?  It doesn't make sense to me like I said surely they have thought of that?

But if you look at your situation a different way, the business, once it has paid for a new website etc.., can't pay you dividends. So you are not giving them up, they aren't there because there is no money in the business. Again, it comes down to the motive. They have dealt with it in universal credit because they look through the company structure and treat you as self-employed. 

Margaret_100

Just to expand a little on what has already been mentioned

As Colcotti said dividend income should be declared but you have not been taking a dividend and plan not to in the future. The same link goes on to mention Notional income 
which includes any income you did not take in order to obtain tax credits. There are various examples but not taking a dividend is not one of them

https://www.gov.uk/guidance/tax-credits-working-out-income

JessicaF_2

Margaret_100 said:

Just to expand a little on what has already been mentioned

As Colcotti said dividend income should be declared but you have not been taking a dividend and plan not to in the future. The same link goes on to mention Notional income 
which includes any income you did not take in order to obtain tax credits. There are various examples but not taking a dividend is not one of them

https://www.gov.uk/guidance/tax-credits-working-out-income

But there is no example at all under that heading - and under the other notional income headings there is only one example. The fact not taking a dividend is not one of them is irrelevant - if you give up income in order to secure an increased tax credit entitlement you can be caught by notional income rules. 

calcotti

JessicaF_2 said:

Margaret_100 said:

Just to expand a little on what has already been mentioned

As Colcotti said dividend income should be declared but you have not been taking a dividend and plan not to in the future. The same link goes on to mention Notional income 
which includes any income you did not take in order to obtain tax credits. There are various examples but not taking a dividend is not one of them

https://www.gov.uk/guidance/tax-credits-working-out-income

But there is no example at all under that heading - and under the other notional income headings there is only one example. The fact not taking a dividend is not one of them is irrelevant - if you give up income in order to secure an increased tax credit entitlement you can be caught by notional income rules. 

As awarding a dividend is not an obligation I don’t see how one can give one up.

JessicaF_2

calcotti said:

JessicaF_2 said:

Margaret_100 said:

Just to expand a little on what has already been mentioned

As Colcotti said dividend income should be declared but you have not been taking a dividend and plan not to in the future. The same link goes on to mention Notional income 
which includes any income you did not take in order to obtain tax credits. There are various examples but not taking a dividend is not one of them

https://www.gov.uk/guidance/tax-credits-working-out-income

But there is no example at all under that heading - and under the other notional income headings there is only one example. The fact not taking a dividend is not one of them is irrelevant - if you give up income in order to secure an increased tax credit entitlement you can be caught by notional income rules. 

As awarding a dividend is not an obligation I don’t see how one can give one up.

I've seen two cases, albeit a long time ago, where HMRC argued just that. I think if there is a pattern of taking dividends and then someone stops and just leaves the money to build up in order to just increase their claim, i think there might be an argument. But it is really theoretical as i haven't seen notional income used in the last probably 5 years in any way. 

sez1231

Thanks for all your help everyone, so if I stop taking a salary from my husband the amount we are jointly taking from the business will go down, so when I come to renew the tax credits they will increase because our earnings are less.  This is what concerns me.  As I said the motives is purely to make a profit to get the business moving a bit rather than take a business loan.  Husband is adamant he doesn't want to do this.