Income falling by £70k - how do I claim tax credits?

DenBo_4

Either meester is a troll or a very greedy person. Just remember meester, what goes around comes around.

nottslass_2

DenBo wrote: »

Either meester is a troll or a very greedy person. Just remember meester, what goes around comes around.

Heaven forbid that meester's business hits hard times and goes under,(don't get me wrong, I wouldn't wish that on anybody) but he'll be kicking himself for not paying himself that 70 k just in order to claim a few grand in tax credits !!!

Jet

It is the system that everyone should be angry with not the OP who is only doing what a lot of people do - claim what they are entitled.

I agree that it is not "morally" right and there is a loophole in the system that should be closed but this post is what this site is all about - not paying out more than necessary and claiming what is allowed.

Yes, I suspect that the OP is enjoying winding you all up :rolleyes:, but I think he has highlighted something that a lot of us were unaware of.

meester

nottslass wrote: »

Heaven forbid that meester's business hits hard times and goes under,(don't get me wrong, I wouldn't wish that on anybody) but he'll be kicking himself for not paying himself that 70 k just in order to claim a few grand in tax credits !!!

I can still pay the 70k next year, or the year after. It really makes no difference to me.

meester

Jet wrote: »

It is the system that everyone should be angry with not the OP who is only doing what a lot of people do - claim what they are entitled.

I agree that it is not "morally" right and there is a loophole in the system that should be closed but this post is what this site is all about - not paying out more than necessary and claiming what is allowed.

Yes, I suspect that the OP is enjoying winding you all up :rolleyes:, but I think he has highlighted something that a lot of us were unaware of.

Not sure that I am enjoying it exactly, although I am certainly not bovvered, so to speak, that people disapprove. We have an entitlement culture in the UK, end of story, it's wrong, but it's reality, you have to work with it, rather than act as if we are still living in the Victorian Salvation Army era. This site in very many areas is about taking advantage. No question that I am doing that, but I daresay that it is far more legal than some of the other stuff that goes on here.

flowerscotland

meester wrote: »

Not sure that I am enjoying it exactly, although I am certainly not bovvered, so to speak, that people disapprove. We have an entitlement culture in the UK, end of story, it's wrong, but it's reality, you have to work with it, rather than act as if we are still living in the Victorian Salvation Army era. This site in very many areas is about taking advantage. No question that I am doing that, but I daresay that it is far more legal than some of the other stuff that goes on here.

you dont have to be posh to be privledged :rotfl: :rotfl:

cash99

Meester

Fair play for trying to be creative with your financial planning, but I am not sure it will work. I am in a similiar position and remember reading something in the past about undistributed profits from close companies potentially being included as notinal income for tax credits.

I can't find the actual reference, but there is some information here. http://www.litrg.org.uk/help/lowincome/taxcredits/whatisincome.cfm#notinc

Also you can pay your wife a dividend next tax year its just that it will be taxed as your income.

Also there is limited benefit now in accumulating funds in a company and taking it as capital through winding up. The CT rate is going up to 22% and the CGT rate will be 18% so 40% overall, no different from dividends.

JonathanA

I'm not going to comment on much of this thread, but as a note of caution to the OP, you need to be careful how much you pay yourself. If you are working within the company, then by law you should have an employment contract. Once you have such a contract to undertake employment duties rather than be an office holder, I believe that you have to pay yourself at least the national minimum wage. The extract from the guidance states:

"The minimum wage does not apply to company directors
unless they have contracts that make them workers.
Company directors are office holders in common law and
can do work and be paid for it in that capacity. This is true

no matter what sort of work is done or how it is rewarded."

I set up a company this year and that was the advice we received from an independent source at the time. It would perhaps be worth seeking some advice from your accountants / tax advisers on this. I'm sure someone with more knowledge of this will offer some advice at some point!

blahdog

Mate do you have an accountant? Any accountant worth his/her salt would have told you that dividends must be drawn to make use of your basic rate band - it's just madness to leave the profits in the reserves if you're not using your basic rate. You'll need to take them out at some point and if your company makes similar profits each year, you'll just be stuck when you want the money back. The little bit of tax credits you've been given will not compare to the extra tax bill you'll get when you do take your money out of the company.

I don't understand what you mean about the company paying more tax because of your wife not taking dividends? You realise profits are calculated on profit BEFORE interest and dividends?

I think this thread is a wind up - there are too many uneducated decisions being made, unless you don't have an accountant and are missing out on this basic financial advice?

meester

cash99 wrote: »

Meester

Fair play for trying to be creative with your financial planning, but I am not sure it will work. I am in a similiar position and remember reading something in the past about undistributed profits from close companies potentially being included as notinal income for tax credits.

I can't find the actual reference, but there is some information here. http://www.litrg.org.uk/help/lowincome/taxcredits/whatisincome.cfm#notinc

Also you can pay your wife a dividend next tax year its just that it will be taxed as your income.

Also there is limited benefit now in accumulating funds in a company and taking it as capital through winding up. The CT rate is going up to 22% and the CGT rate will be 18% so 40% overall, no different from dividends.

Thanks.

That page above is the only page I could find, though it didn't seem entirely authoritative. I'm surprised there's nothing on HMRC site, because close companies are otherwise fairly well scoped out.

There is quite substantial benefit in accumulating funds in the company.

The CGT rate is 10% for business assets, under the new entrepeneur's tax relief, up to £1m lifetime gains. I doubt my gains will accumulate to that level. This is more-or-less the same as 75% taper relief on business assets at the moment with 40% CGT, given that taper relief has been scrapped.

The issue is at the moment, I can pay roughly £60k of dividends at ZERO tax, because corporation tax-paid dividends impute the basic rate of income tax.
So by not claiming this year, I end up paying 10% * £60k = £6k of capital gains tax when I wind up.

So given the immediate access to money, the transfer to personal capital which is easier for me, the favourable personal savings environment versus business, it made no sense for me to claim tax credits, as the amount I would have got before the recent birth of my baby (second child) was only about £5k.

But the circumstances have changed, firstly by getting an extra £2.3k(approx) from having second child in tax credits, and the fact that as of next year I can only claim £30k of dividends, which would be £3k of CGT in the future.

Even so I would be not be considering claiming tax credits for the issue of £6k tax vs. £7.5k tax credits + added hassle, but Labour's attack on married couples has made it far more sensible. As ever, changes to tax law have unintended consequences, in this case, motivating me to claim benefits, because those hit by the dividend change - working partner, non-working partner, in an ltd. company are highly likely to be eligible for tax credits due to the fact the non-worker is probably not working because she is raising kids, and hence eligible for numerous tax credits.