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

13

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  • seatbeltnoob
    seatbeltnoob Posts: 1,309 Forumite
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    I have a further question to ask.

    because of the chinese news year which takes place in Feberuary. I had to order a lot more stock than I need to cover me for longer period. so i have generared a self employment loss.

    I am at around -£1000 loss in total. And paid myself through PAYE a total of £1410.89.

    I am thinking of holding retained profit in the business and not paying myself wages.

    I want to know, in the next month, if I dont pay myself through PAYE, what order would UC absorb the past losses.

    My MIF is £1410.89, accrued SE loss is -£1000. My profit next month is £1510.89. I don't pay myself through PAYE that month. Will it be treated as method 1 or method 2?

    Method 1) Historical losses are worked off from excess profits.
    I have met the MIF that month, have £100 profts above MIF and that £100 will reduce the losses carried forward, so I will have -900 self employment losses going forward.

    Method 2) Historical losses are worked off first.
    The £1510.89 profits will first work off the -£1000 historical losses. So I will have £510.89 profit in this month. It is below the MIF. MIF will apply. Historical losses are all balanced off.
  • Yamor
    Yamor Posts: 400 Forumite
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    Method 2 unfortunately.

    By the way, just because you want to leave the money in the business, that does not you mean you shouldn't pay yourself £1410.89 through PAYE. You can always put them money back in as a loan...
  • seatbeltnoob
    seatbeltnoob Posts: 1,309 Forumite
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    edited 14 January at 12:28PM
    Yamor said:
    Method 2 unfortunately.

    By the way, just because you want to leave the money in the business, that does not you mean you shouldn't pay yourself £1410.89 through PAYE. You can always put them money back in as a loan...

    i want to improve the balance sheet. there's no other reason other than making the balance sheet better. Before UC I used to just use the tax free amount and leave the rest.

    But If it's worked out using method 2 then I'll for sure keep using PAYE at MIF until i can clear all past losses.
  • Grumpy_chap
    Grumpy_chap Posts: 14,860 Forumite
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    edited 14 January at 3:28PM

    a ltd company director - their businesses is an analogous self employed business. 
    AIUI, in the case of a single-owner / Director Ltd Co, UC looks through the veil of the Ltd Co at the underlying income and expenses.  For the very reason that the owner can massage the monthly figures otherwise to increase the entitlement to UC.
    (EDIT:  The following link refers to the understanding I suggested and indicates that UC will ignore the salary the OP pays to themselves so the Ltd Co making a loss but the OP receiving a salary at MIF would not achieve the objective the OP desires:
    https://www.entitledto.co.uk/help/company-directors-and-self-employment )



    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.

    If the Ltd Co. is paying interest to you as the sole shareholder / Director then you (individual) must have lent the  Ltd Co. money.
    For interest of £1k to be paid, and assuming an interest rate of 5%, that would suggest that you (individual) have lent your Ltd Co. £20k. 
    How is that any different to you (individual) having £20k in a savings account?
    Has is this Director's Loan to the Ltd Co. considered from a UC point of view?  Is it assessed as capital?
  • seatbeltnoob
    seatbeltnoob Posts: 1,309 Forumite
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    edited 14 January at 3:01PM


    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.

    If the Ltd Co. is paying interest to you as the sole shareholder / Director then you (individual) must have lent the  Ltd Co. money.
    For interest of £1k to be paid, and assuming an interest rate of 5%, that would suggest that you (individual) have lent your Ltd Co. £20k. 
    How is that any different to you (individual) having £20k in a savings account?
    Has is this Director's Loan to the Ltd Co. considered from a UC point of view?  Is it assessed as capital?

    I asked accountants on this, and they have told me that there is no concrete guidance on the interest rate the business pays on the directors loan. it has to be realistic. No market lender will issue business loans at 5% at this current climate. That is below the bank of england base rate. I would hazard a guess and say a bank now would lend around 8-10% APR.

    The other factor you haven't taken into consideration is that the business may owe the director £20K. But the business may not actually have £20K in its bank account. 

    In my case there is a £9K directors loan and there is just £4K in the business bank accounts as the money in in stock.

    Basically to stay safe it has to be a typical commercial loan rate - a rate at which the business would realiastically borrow from a third party.

    Under UC these interest payments on DLA is ignored. For corporation tax purposes it does help. It will reduce the taxable profits down £1000. But it's a very convoluted process so I have no gone agead with it. The business has to declare these interest payments on some form, and pay the interest tax on it, and then the director reclaims the tax on that interest through self assessment.

    it is quite complicated and it's not really worth my time looking into it. Also there is still a bit of doubt if the directors loan interest can form part of of your personal savings allowance. Most of the accountants on the bookeeping boards I post on agreed that it can. But the guidance from HMRC doesn't explicitly say so.

  • Grumpy_chap
    Grumpy_chap Posts: 14,860 Forumite
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    In my case there is a £9K directors loan and there is just £4K in the business bank accounts as the money in in stock.
    .
    Under UC these interest payments on DLA is ignored. 

    You have taken professional advice on the appropriate interest rate, so that is good.

    I would have expected that UC would require the personal capital to be declared as such.  Others may know more definitively.
    The fact the Ltd Co does not have the £9k in the operating bank is likely to be immaterial - there would be little purpose to the Ltd Co borrowing £9k to then hold that amount in cash bank account whereas funding stock is a clear business purpose for taking the loan.

    UC ignoring the interest payment would seem to be consistent with my post above - that the UC looks through the Ltd Co to the underlying income position of the business.
  • seatbeltnoob
    seatbeltnoob Posts: 1,309 Forumite
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    In my case there is a £9K directors loan and there is just £4K in the business bank accounts as the money in in stock.
    .
    Under UC these interest payments on DLA is ignored. 

    You have taken professional advice on the appropriate interest rate, so that is good.

    I would have expected that UC would require the personal capital to be declared as such.  Others may know more definitively.
    The fact the Ltd Co does not have the £9k in the operating bank is likely to be immaterial - there would be little purpose to the Ltd Co borrowing £9k to then hold that amount in cash bank account whereas funding stock is a clear business purpose for taking the loan.

    UC ignoring the interest payment would seem to be consistent with my post above - that the UC looks through the Ltd Co to the underlying income position of the business.

    on a seperate thread, I have asked that. Your shares in your own business is disregarded it is not like holding shares on another company like BP/Shell etc.
  • Grumpy_chap
    Grumpy_chap Posts: 14,860 Forumite
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    edited 14 January at 5:58PM

    on a seperate thread, I have asked that. Your shares in your own business is disregarded it is not like holding shares on another company like BP/Shell etc.
    I have not seen your other thread, so may have missed something.

    There is a difference between shares in your own Ltd Co. and a Director's Loan to your own Ltd Co.
    The Director's Loan has a value of £9k.
    Typically, shares in your own Ltd Co. would be a nominal sum, for example 100 shares at £1 each, so a total shareholder value of £100.

    What was the other thread referring to?
    EDIT - I have looked under your user name and the relevant thread was not obvious (to me, anyway).
  • Yamor
    Yamor Posts: 400 Forumite
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    Just to clarify a few points here:

    1) Although UC treat the profit of a trading company as self-employed income, that is after taking into account any PAYE salary, which would then reduce the profit of the company. See Reg.77(4).
    So it is possible to ensure you always hit your MIF.
    The Entitledto guidance linked to above is wrong on this.

    2) A director's loan would appear to be an asset, although it could fall to be heavily discounted where the company does not currently have the funds to repay it.
    It has however been suggested that Reg.77 can be used to disregard the value of the loan. See here: https://www.rightsnet.org.uk/forums/viewthread/19442/#91878
    Interest on the loan is ignored for UC anyway, because interest is never a type of income taken into account by UC.
    At the bottom of page 1 of this thread I posted about the admin necessary if you want to pay yourself interest on your director's loan.

    3) it is worth noting that although shares may start out being worth very little, their value will often increase substantially over time, and the disregard provided by Reg.77 for the value of the shares is very necessary.
  • Grumpy_chap
    Grumpy_chap Posts: 14,860 Forumite
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    Yamor said:
    Just to clarify a few points here:

    1) Although UC treat the profit of a trading company as self-employed income, that is after taking into account any PAYE salary, which would then reduce the profit of the company. See Reg.77(4).
    So it is possible to ensure you always hit your MIF.
    The Entitledto guidance linked to above is wrong on this.

    2) A director's loan would appear to be an asset, although it could fall to be heavily discounted where the company does not currently have the funds to repay it.
    It has however been suggested that Reg.77 can be used to disregard the value of the loan. See here: https://www.rightsnet.org.uk/forums/viewthread/19442/#91878
    Interest on the loan is ignored for UC anyway, because interest is never a type of income taken into account by UC.
    At the bottom of page 1 of this thread I posted about the admin necessary if you want to pay yourself interest on your director's loan.

    3) it is worth noting that although shares may start out being worth very little, their value will often increase substantially over time, and the disregard provided by Reg.77 for the value of the shares is very necessary.
    I linked the guidance in good faith - apologies if it is incorrect or incomplete.  EntitledTo are usually a reliable source.

    With regard to interest being disregarded by UC. 
    My understanding is that is because interest income is only received if there is capital (savings) and savings are assumed to generate an income rate which results in the reduction to UC entitlement on the sliding scale.
    If there was a capital deduction to UC (assumed income) plus the actual income was taken into account, this would be double-counting by UC.
    If the capital (Director's Loan to Ltd Co.) is also discounted, that creates a double-win for the OP.

    My comment about the shares was really in the context that, as I read what was posted, the OP seemed to be treating the shareholding (often nominal) and the Director's Loan as the same thing.  They are not.  There are significant differences between the owner introducing additional share capital to the Ltd Co. or providing funding by way of Director's Loan to the Ltd Co.  Even if the impact on UC is zero, the difference are important enough that it is worth being sure not to conflate the two.
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