UC - earnings below minimum income floor for a one off month.

seatbeltnoob
seatbeltnoob Posts: 1,294
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edited 15 October 2023 at 2:16PM in Benefits & tax credits
Hi

I made a big mistake with how I handled my cash flow. I had a lot of outgoings out in one month where I have to place bulk orders for stock.

This has left me with total profit for the month of £620. This is aytpical because most months my profit is around £2100.

My minimum income floor is £1410.89

SInce UC will treat my income as £1410.89. I assumed that the difference of the MIF and my actual profits would be carried forward as a loss for future months. So my balance would be -790.89 loss for next pay period so I can recoup my loss next month.

it seems that I don't actuall get a break next month. And I start with £0. is that correct?
 
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  • seatbeltnoob
    seatbeltnoob Posts: 1,294
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    edited 15 October 2023 at 3:04PM
    Unfortunately I think I've lose that -£790.89 loss. 

    Actually it's administratively easy to exploit a loophole.

    I'd I paid myself using PAYE for the amount [after tax] of £1410.89 it would have created a self employment loss of -£790.89 for the business.
  • Yamor
    Yamor Posts: 314
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    Yes, this is correct, unfortunately.

    Your second post is always my advice to those people trading through a limited company. I wouldn't even call it a loophole.
    Clearly if you're self employed then it wouldn't be possible, as you can't pay yourself a wage...
    This is one of the few advantages of trading through a limited company when on UC (on tax credits the advantages were far greater).
  • seatbeltnoob
    seatbeltnoob Posts: 1,294
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    edited 15 October 2023 at 5:14PM
    Yamor said:
    Yes, this is correct, unfortunately.

    Your second post is always my advice to those people trading through a limited company. I wouldn't even call it a loophole.
    Clearly if you're self employed then it wouldn't be possible, as you can't pay yourself a wage...
    This is one of the few advantages of trading through a limited company when on UC (on tax credits the advantages were far greater).

    I should have enquired about this before I processed this. Lesson learnt for future I suppose. I wrongly assumed this would all be fairly done.

    It is a ltd co and I'll bear that in mind for future. I have to purcase stock every 3 months, VAT return every 3 months. Perhaps I'll do my big market spends every 3 months so I can sculpt a more even income. I know they carry forward surplus earnings. I dont know why they dont carry forward losses due to MIF application.


  • Spoonie_Turtle
    Spoonie_Turtle Posts: 8,166
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    edited 15 October 2023 at 4:25PM
    Yamor said:
    Yes, this is correct, unfortunately.

    Your second post is always my advice to those people trading through a limited company. I wouldn't even call it a loophole.
    Clearly if you're self employed then it wouldn't be possible, as you can't pay yourself a wage...
    This is one of the few advantages of trading through a limited company when on UC (on tax credits the advantages were far greater).

    I should have enquired about this before I processed this. Lesson learnt for future I suppose. I wrongly assumed this would all be fairly done.

    It is a ltd co and I'll bear that in mind for future. I have to purcase stock every 3 months, VAT return every 3 months. Perhaps I'll do my big market spends every 3 months so I can sculpt a more even income. I know they carry forward surplus earnings. I dont know why they dont carry forward losses due to MIF application.
    Probably because it's not loss of earnings (which I believe you can carry forward and take off the next month's profit, if you do mage an overall loss?).  The MIF is a condition of claiming UC when self-employed so any 'losses' of benefit arising from that you've essentially agreed to, by claiming. 
    Though I know you don't have much choice - you either claim, or get no help - and I'm not commenting on whether I think it's fair or harsh.
  • seatbeltnoob
    seatbeltnoob Posts: 1,294
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    edited 15 October 2023 at 5:16PM
    Spoonie_Turtle


    I dont know if you followed what Yamor has said earlier. Basically you can get very different treatment based on how you administer your earnings.

    Lets say MIF is £1500 for simplicity.

    If you dont pay yourself via PAYE and your profits are just £500 for the month. You will get UC award as if you earnt £1500

    If OTOH you are a ltd co, you can pay yourself via PAYE an amount of £1500 (even though the business hasn't made this profit). Which would record a self employment loss of -£1000

    On the above 2 examples the UC award will be the same. Both will award based on having earnt £1500. 

    But the latter example the claimant will essentially get £1000 worth credit to earn profits without deductions for the following month. 

    So the next month the claimant can make a profit of £2500 and get treated like they have earnt £1500.

    All because of an administrative issue and forward planning.

  • Spoonie_Turtle


    I dont know if you followed what Yamor has said earlier. Basically you can get very different treatment based on how you administer your earnings.
    I understand that.  I was literally just addressing your point I highlighted in bold about why self-employed people can't count losses of UC.  Unless I completely misunderstood your point there.
  • seatbeltnoob
    seatbeltnoob Posts: 1,294
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    edited 15 October 2023 at 5:22PM
    Oh yes. Sorry I didn't realise what you were trying to say.

     It's just a weird quirk of the system. If two scenarious would treat UC vastly different. There is a fundamental unfairness.

    IMHO this is just down to the system they've built which is unable to cancel PAYE coming in from your own company. If it was able to identify and cancel it out. It would then be done exactly like a sole trader applicant.

    Sole traders dont have the ability to sculpt their incomes like above and most businesses have cycles where their cash flow directions fluctate a lot, periods of lots of money coming in, and perods of lots of money going out. A ltd co owner has the ability to absorb cashflow out periods better with PAYE
  • Yamor
    Yamor Posts: 314
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    edited 15 October 2023 at 7:00PM
    Yamor said:
    Yes, this is correct, unfortunately.

    Your second post is always my advice to those people trading through a limited company. I wouldn't even call it a loophole.
    Clearly if you're self employed then it wouldn't be possible, as you can't pay yourself a wage...
    This is one of the few advantages of trading through a limited company when on UC (on tax credits the advantages were far greater).

    I should have enquired about this before I processed this. Lesson learnt for future I suppose. I wrongly assumed this would all be fairly done.

    It is a ltd co and I'll bear that in mind for future. I have to purcase stock every 3 months, VAT return every 3 months. Perhaps I'll do my big market spends every 3 months so I can sculpt a more even income. I know they carry forward surplus earnings. I dont know why they dont carry forward losses due to MIF application.


    This is clearly something to discuss with your accountant, but you should anyway be taking a PAYE salary of £1,048 every month, even if you have no-one else on your payroll (and are therefore not entitled to the employment allowance).

    Purely from a tax perspective, it would normally be more beneficial to take further drawings as dividends, rather than salary (as the effective tax rate on divis is 26.1%, whereas the effective tax rate for salary over £1,048 is 40.25%).

    However, the 40.25% effective tax on salary would reduce your income for UC purposes, whereas the 26.1% effective tax on divis does not seem to do so. As such, you recover over 22% of the tax on salary, meaning it is actually still the better option.

    I would therefore recommend always taking a salary at least equal to the MIF, and potentially even higher. Of course, if you will be reinvesting some of the profits in the business then this won't be relevant.

    I have assumed here that any corporation tax would not be an allowable expense for UC purposes, as that seems to be the case legally. It is very possible UC would allow it as an expense though (and logically I'd have thought it makes sense to allow it), in which case divis is the better option over £1,048/month.

    You could even potentially make an argument that the income tax on any divis should be allowable for UC purposes, but I can't imagine you'd win that one.

    All of this is very complex advanced stuff, and you should obtain proper advice first (although I don't think there are many people who can advise on this!).

    Just on the argument that having income below the MIF should be allowed to be carried forward as a loss: I actually suggested this many years ago on Twitter (not that anyone of importance sees my Twitter feed!):

  • seatbeltnoob
    seatbeltnoob Posts: 1,294
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    edited 16 October 2023 at 12:37AM
    Yamor said:

    I have assumed here that any corporation tax would not be an allowable expense for UC purposes, as that seems to be the case legally. It is very possible UC would allow it as an expense though (and logically I'd have thought it makes sense to allow it), in which case divis is the better option over £1,048/month.

    My tax affairs are a bit complicated. I do some sole trader work around £300 a month and through my ltd company i pay myself wages equivalent of just under the employer NI limit.

    through company tax basis (not UC basis). I claim use of home £340PA, £300 trivial benefits, £1000pa interest to director and £1000 dividend. I have losses carried forward and business owes me directors loan which is why I'm not putting the money through PAYE. 

    But I know to do it throuh PAYE when UC profits are low in that pay period and I want to carry forward losses.

    The bit in the quote above is an interesting one, and a quagmire I haven't actually come across as I;ve never paid any CT while under UC. So I dont know.

    My understanding is UC is based around after tax income or take home pay..

    a ltd company director - their businesses is an analogous self employed business. corporation tax on the business is similar to income tax on the individual so for UC it should be an allowable expense.

    You pay income tax & NI on whatever you put through PAYE and the rest that's left in the business you pay corporation tax on.

    But I'm not sure if this is absolutely correct and need to research this.
  • Yamor
    Yamor Posts: 314
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    The director's loan is an interesting one. There does not seem to be any disregard for it (there is only a disregard for the trading assets of the business), in which case it could actually affect your UC claim as an asset. It's very possible that it isn't worth very much though, because presumably it is unsecured, and can be heavily discounted.

    I assume you know that you should be deducting tax and submitting CT61's for the interest, and claiming the tax back personally. The interest must also be charged at a commercial rate.

    Also, dividends can only be declared out of retained earnings, so if you are making losses you have to be careful you have sufficient reserves to pay the dividends.

    Regarding the corporation tax being an allowable deduction for UC, I agree with you that logically it should be allowed (as I wrote in my original comment). The problem is that the legislation does not seem to provide for it (see Reg. 57(2) Step 3, which only provides for IT and NICs as deductions for self-employed claimants). I think in practice DWP will probably allow them though.
    More questionable is whether they would allow deductions for the IT on any dividends taken...
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