earnings and children tax credits

[federusa]

Suppose I have a limited company and only paid myself salary as director up to my anual tax allowance. Supose the company made a profit of 20000 but I decided no to pay myself any dividends. I payd then corporation tax on the 20000.
If i am claiming child tax credits for my kids the only money that will be taken into account will be the salary as Director isnt it? (assuming I dont have any other income)

Thanks!!!

[saxondale]

thats one way to play the system yes

[federusa]

what that mind honest opinion?

I have been paying taxes all my life and getting f...all in exchange. I just need a break for a year until my kids (twins!!0 start school). As far as it isnt ilegal....

[saxondale]

what that mind honest opinion?

I have been paying taxes all my life and getting f...all in exchange. I just need a break for a year until my kids (twins!!0 start school). As far as it isnt ilegal....


don`t forget the free NHS benefits too!















the wife has very straight teeth

[MyAccountantOnline]

Suppose I have a limited company and only paid myself salary as director up to my anual tax allowance. Supose the company made a profit of 20000 but I decided no to pay myself any dividends. I payd then corporation tax on the 20000.
If i am claiming child tax credits for my kids the only money that will be taken into account will be the salary as Director isnt it? (assuming I dont have any other income)

Thanks!!!

Yes - the reason being is that you and your company are completely separate for tax purposes, and tax credit purposes.

You dont pay tax on the company profits and the company income has no effect on your tax credit claim.

[Philip Hoyle]

Just remember that for working tax credits purposes your co does have to pay you at least the national minimum wage for the hours you declare you are working. This is part of the working tax credit rules and over-ride the general rule about directors not having to pay NMW.

[Jenni384]

Philip

Your excellent response on the long thread on this topic a year or so ago here (http://www.ukbusinessforums.co.uk/forums/showthread.php?t=90370&page=3)mentions the anti avoidance provisions - being that if the company can afford to pay dividends and doesnt (as per the OP) to articifically enhance the WTC claim, this is not allowed.

I also thought the upshot of this was that as long as the company can afford to pay dividends, and does so, then the usual salary/dividend mix is ok for WTC (as they are effectively being paid over minimum wage) - and the NMW through the payroll doesn't apply?

DOn't get too bogged down with concentrating on employment law. It is tax law that matters here and it is clear that a director is an employee for tax purposes. I can't think of any case where a director was held to be self employed for tax purposes.

Per HMRC tax credit manual (http://www.hmrc.gov.uk/manuals/ntcmanual/eligibility_selfemp/ntc0360120.htm)

A director of a limited company is usually employed by that company under a contract of service. He may also be an office holder within the company In either case, remuneration is taxed under the Income Tax (Earnings and Pensions) Act 2002

You have to appreciate that tax law re employment is completely different from employment law. For tax law, there is no significance as to whether there is a contract of employment or not. It's only relevance is for NMW.

A "low" wage for tax purposes carries through to the tax credit system. There is no link between hours worked and wages in the tax law system. It follows that it is entirely possible for a director to pay a low wage yet still work the requisite number of hours. Both matters are capable of proof in their own right and nothing in the tax laws require them to be linked.

HOWEVER, be very careful as there is an anti-avoidance provision (http://www.hmrc.gov.uk/manuals/ntcmanual/eligibility_income/ntc0320050.htm#6) which may apply where wages and dividends have been artificially reduced to increase the tax credit award:-

Claimants providing services to other persons for less than full earnings
The claimant is treated as having an amount of employment or trading income that is reasonable for that employment, if they provide a service for another person and


The other person makes no payment of earnings or pays less than for a comparable employment, trading or business in the area

And


The Board are satisfied that the other person has the means to pay for, or to pay more for the service

Obviously, for this to apply, their own limited company would have to come within the definition of "other person", so it is likely that this would have to be decided in the courts as to whether it did apply to directors limited companies, and HMRC would have to prove that the company could have paid a full wage/dividend package - i.e. that it had the money to pay and didn't need the money for other business purposes. I think this would be exceptionally difficult to prove and have heard of no challenges under this anti avoidance rule.

So to summarise, forget contracts of employment etc as that is a red herring here. It is the fact of whether the director works the requisite number of hours that triggers the tax credit entitlement (not necessarily how he is paid). Just remember that dividends have to be declared as other income.

[UKSBD]

Depending on how much money you need to live on you can do it in
12 monthy cycles.

i.e.
You pay yourself a maximum dividend 1 year, zero the next.
obviously depends on ammount of hours you work and other factors, but
ideal for a husband and wife team with equal shares doing equal work and
both working 16 hours a week.

They can effectivelly earn over £90,000 Tax Free over 2 years and on
alternate years get another £7,000 of the goverment plus free dental care
prescriptions etc.

[Philip Hoyle]

Philip

Your excellent response on the long thread on this topic a year or so ago here (http://www.ukbusinessforums.co.uk/forums/showthread.php?t=90370&page=3)mentions the anti avoidance provisions - being that if the company can afford to pay dividends and doesnt (as per the OP) to articifically enhance the WTC claim, this is not allowed.

I also thought the upshot of this was that as long as the company can afford to pay dividends, and does so, then the usual salary/dividend mix is ok for WTC (as they are effectively being paid over minimum wage) - and the NMW through the payroll doesn't apply?

If I remember correctly, I was quite rightly shot down in flames by another poster on that same thread who quoted the tax credit regulations basically requiring national minimum wage to be paid. Perhaps looking later on in that thread you'll see the other responses which contradicted mine!

Edited: Looking at the thread referred to, it was in the very next post that Wild Goose quoted legislation saying the a contract of service was required for directors in order to claim working tax credits, which in turn leads onto payment of minimum wage being required. I've never really thought about how dividends come into the mix when considering whether NMW has been paid under WTC regulations - I suspect it doesn't. Gets very complicated doesn't it - I'm glad I havn't done any tax credit advice for clients who may be affected like this.

[Jenni384]

Thanks Philip.
I will go back and have another read of it. As you say - a very complicated area!

[UKSBD]

I think it boils down to what is a "reasonable rate" for the job you do and
whether it is comparative to what you earn if you do the job elsewhere.
i.e.
My wife does 16 hours a week helping with filing, invoices etc.
We could get someone on minimum wage doing the same, so it is perfectly
acceptable to pay my wife 16 hours x NMW