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

meester

blahdog wrote: »

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.

Er, which accountant would tell you that the 25%/10% tax on dividends (as higher rate taxed income/capital distribution, respective) is more than the 39% withdrawal rate on tax credits.

It totally depends on your situation, and how much tax credits you are entitled to compared with the remaining size of your basic rate allowance taking into account your income.

Check 2008/2009 basic rate allowance: £34,600. That's a £31,140 net dividend (based on 10% dividend tax credit).

By not taking advantage of that and paying out £31,140 (although for most people this will be less, because of savings income), you will pay at some point in the future, on that £31,140, either:

1. As higher rate tax payer, as a dividend, taxed at at 25% on net dividend receipts: £7,785
2. As a capital gain on winding up or selling the company (10%): £3,114
3. As a basic- or non-tax payer (perhaps retired, taking time off), £0

You have to set this against your benefits entitlement, which in my case starts at, based on two kids including a baby, and 30 hours a week worked, £9,565 for 2008-09, and is withdrawn at 39%. Hardly a little bit of tax credits.

It is rather dangerous and arrogant to say that it is always best to pay the basic rate allowance worth of dividends, if you haven't actually done the sums to check this. Maxims must have an evidential basis, and when it comes to finances it's a simple matter of checking the maths.

In this case, the base tax credits are higher than the highest possible dividend tax, although with some withdrawal due to dual incomes, the amounts work out quite similar. It is something of a wash, if you ignore entrepeneur's capital gains tax, of 10% but if you take it into account, you keep a LOT more money by claiming tax credits and then paying 10% CGT on wind-up. Granted, 10% CGT is more than 0% on basic rate dividends, but it is far less than the 39% you lose in benefits.

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?

Yes I understand basic accounting quite well thank you. I did not say the company would pay more tax. What I was referring to was the new income-shifting legislation which is supposed to be being past in April, whereby a shareholder in a close company (i.e. my wife) that does not earn it money will be taxed at the income earner's rate, thereby meaning that as a married couple, we can only usefully pay ONE dividend equal to basic rate, and hence I end up paying more tax. Me, not my company.

I suggest you google 'income shifting' for more information.

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?

From your post it seems you never question what you have read. Somehow I doubt that my accountant, or yours, could be bothered fiddling about with analysis of marginal tax rates on benefits, especially when the situation is based on legislation that is not coming into effect until April.

cash99

meester wrote: »

Thanks.

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.

Yes sorry forgot about this recent change. Only just got used to the 18% regime.

Just had a look at the HMRC manuals on tax credits and they are very thin on detail, however I think you would be caught under either income deprivation or providing services for less than full earnings. http://www.hmrc.gov.uk/manuals/tctmanual/TCTM04900.htm

Pity though as the tax credits would make up for the impact of the income shifting provisions, provided you have the cash to see it through.

tomstickland

Jeez it just sounds like jealousy.

Maybe it annoys some people to see someone trying to extract £8K of our tax money by creative accounting.

meester

cash99 wrote: »

Yes sorry forgot about this recent change. Only just got used to the 18% regime.

Just had a look at the HMRC manuals on tax credits and they are very thin on detail, however I think you would be caught under either income deprivation or providing services for less than full earnings. http://www.hmrc.gov.uk/manuals/tctmanual/TCTM04900.htm

Thanks.

That is the first truly useful link I have found

Income deprivation does not seem to be relevant.

That's quite specific:

Deprivation occurs if a claimant gives up, or transfers to another person, an income which was received, or due to be received, to gain or increase entitlement to tax credits.

For example, a claimant may, by a deed of gift, transfer entitlement to an occupational pension to someone else.

That is talking about gift or transfer of income. That's not the case for dividends not being paid to anyone.

This seems more relevant:

Claimants provide services to others for less than full earnings

If a claimant provides a service for another person and:

<LI class=filledcircle>

the other person makes no payment of earnings or pays less than for a comparable employment, trade or business in the area; and <LI class=filledcircle>the Commissioner's for Revenue & Customs are satisfied that the other person has the means to pay for, or to pay more for the service, then
[*]The claimant is treated as having an amount of employment or trading income that is reasonable for that employment, trade or business. that could quite conceivably apply.

dmg24

Is he still rambling on?















(Can't wait until someone reports him to HMRC ... )

Murphy_The_Cat

meester wrote: »

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.
/

I may be missing a trick here - but why is Mrs Meester unable to get paid her dividends next year ? surely, she'll still own the shares and will be able to show/prove an active involvement in the Company

lil_me

I think this is the first time I have even thought this, but people like this make me sick, never wished for someones business to to seriously fail until now. It's fraud, I don't care what back exit you are using to do it, it's fraud. I don't agree with it, I find it disgusting, I hope that one day your children find out that you brought them up by doing such things and hate you for it.

see what a great mood this thread has put me in, I'm usually a nice person. dmg, ok this person has not disclosed their details to us but I am sure that if HMRC believed something illegal was going on they would ask MSE website for as much detail on the person as possible. I've ran a forum who's had to hand over details to DWP before inc logs, email addresses, names, IP addresses etc etc.

meester

lil_me wrote: »

I think this is the first time I have even thought this, but people like this make me sick, never wished for someones business to to seriously fail until now. It's fraud, I don't care what back exit you are using to do it, it's fraud. I don't agree with it, I find it disgusting, I hope that one day your children find out that you brought them up by doing such things and hate you for it.

see what a great mood this thread has put me in, I'm usually a nice person. dmg, ok this person has not disclosed their details to us but I am sure that if HMRC believed something illegal was going on they would ask MSE website for as much detail on the person as possible. I've ran a forum who's had to hand over details to DWP before inc logs, email addresses, names, IP addresses etc etc.

Sorry, but that's really not an acceptable thing to post on here.

Grossly, totally abusive.

I have been trying to have a civil discussion about the possibilities for claiming tax credits, in terms of what is legal and allowed, and your contribution is to be groslly rude and abusive.

"this site is here to help people with their money, and not to judge"

I have already responded to a lot of garbage from people saying how it's wrong to claim benefits because people like me shouldn't be able to get anything (write to your MP, tell them to change/scrap the system if you like, I really don't care, get the system changed if it's wrong), but your hateful abuse, nasty threats about reporting me, for even trying to have a discussion, I cannot accept.

If you want to whine about benefits, go ahead, go to the Discussion Time forum, go do it there: here's some other dole scroungers for you http://burningourmoney.blogspot.com/2008/02/dole-scroungers.html (although I none of these actually contribute tens of thousands in taxes per year to the economy, and several are actually breaking the law committing, so they probably won't wind you up as much as someone who wants to get the maximum he's legally entitled to). But don't do it to me.

meester

Murphy_The_Cat wrote: »

I may be missing a trick here - but why is Mrs Meester unable to get paid her dividends next year ? surely, she'll still own the shares and will be able to show/prove an active involvement in the Company

Because the friendly government has decreed that all dividends, as of April, paid to her, are deemed as having being paid to me instead. Which means that instead of receiving £30k, inside the basic rate allowance, and no further tax to pay, I would have to pay higher rate tax on it, which is 25% on dividends

And hence I would have to pay £7.5k extra tax to get the money out.

dmg24

I don't think that lil_me was offensive or abusive. I find your posts much more offensive.