Benefits & Ltd Company

**i-am-ltd** · 28 October 2007, 20:05

helloo!

Any comments?

**Bluebird** · 29 October 2007, 10:55

Yes you get Child Benifit.

The other 2 are means tested - if you go to the HMRC website you can get a "quote" on-line of your entitlement.

**mashetti** · 29 October 2007, 12:16

Originally posted by i-am-ltd View Post

So for the first year I can take £37,150 in dividends (£66,350 less our salaries (£24000+£5200).

Can you live on only taking like 13k divs as you are putting yourself into the higher bracket and paying shed loads more tax...

**hugebrain** · 29 October 2007, 12:20

Originally posted by Bluebird View Post

Yes you get Child Benifit.

The other 2 are means tested - if you go to the HMRC website you can get a "quote" on-line of your entitlement.

I think the real question is can you earn a fortune, but leave it in the company, pay yourself a pittance and scam the tax-payer for thirty grand or so to live on (depending on the number of sprogs)?

**ASB** · 29 October 2007, 14:53

Originally posted by hugebrain View Post

I think the real question is can you earn a fortune, but leave it in the company, pay yourself a pittance and scam the tax-payer for thirty grand or so to live on (depending on the number of sprogs)?

Yes.

Also there is a 25k year one year disregard for changed circumstances which can help the more creative

**dude69** · 29 October 2007, 15:00

Originally posted by hugebrain View Post

I think the real question is can you earn a fortune, but leave it in the company, pay yourself a pittance and scam the tax-payer for thirty grand or so to live on (depending on the number of sprogs)?

Without doubt.

The company's money is not yours.

On £10,000/year: £6,610 for two people.

You can get extra money on top of that to pay for childcare/nursery school.

For some reason tax credits are not assessed on your savings - you can have unlimited capital, they only means test income.

So for example, if you need £30,000 per year to live on, then you can get out roughly £5k income for you plus same for spouse, plus £30k in dividends from next year (new rules on income shifting mean no dividends for spouse). To take out 2 years' income, would require another £20k dividend, which would require payment of £6,666.67 in income tax.

In the next tax year, you would then receive £10k, plus £6,610 in tax credits.

So by comparison, taking out £30k/year in both years in dividends:

Y1, salary paid = £10k, company profits = £56,667 post corporation tax, dividend paid = £30k, retained profit = £26,667
Y2, salary paid = £10k, company profits = £56,667 post tax, dividend paid =£30k, retained profit = £26,667

So total salary = £20k + dividend of £60k = £80k received, with retained profit of = £53,334

vs.

Y1, salary paid = £10k, company profits = £56,667 post corporation tax, dividend paid after tax = £50k, retained profit = 0
Y2, salary paid = £10k, company profits = £56,667 post tax, dividend paid = £0, benefits received = £6,610, retained profit = £56,667

Total salary = £20k + £6,610 benefits + dividend of £50k = £76,610 received, with retained profit = £56,667

So it works out roughly the same on the basis of paying out an extra £20k dividend in year 1, and living off benefits in year 2. If OTOH, you have more substantial savings, sheltered in income tax-free means, you would not need to pay out the dividends, the 25% tax on which quickly offsets any tax credits payable.

If you can just live off the £16,610/year that two salaries plus benefits would pay you.

E.g.,

Company makes £30k year Post-tax Profit, and pays 2 * £5k salaries.

After 5 years, you have received £50k in salaries, £33k in benefits (at a minimum), and the company has £150k left. Pay it out as a capital gain (doesn't affect tax credits), and you have £50k + £33k + £123,000 (new 18% tax rate) = £206,000 received

Cf.:

paying it all out every year = £40k/year in salaries * dividends. After 5 years, zero left in the company, and you have received £200,000. So you are £6,000 worse off over 5 years. Which is not huge really.

The current 10% CGT is obviously more favourable - it would leave you £18k better off on benefits.

I have no doubt that there are company directors doing legal and not-so-legal schemes to claim tax credits, not to mention th e armies of fake claimants and general chavscum that don't even bother working, just claiming.

I think other benefits are means tested though, so the other advantages of being on benefits - free museums, bus travel, prescriptions, etc, might not be available.

Some of them would be though.

**dude69** · 8 February 2008, 21:07

Just doing a bit more investigation into this. Bit aggrieved at the 'income shifting' rules.

Here's the rules, disregarding any disabilities :

Child benefit: not means tested, make sure you are getting paid it for all of your children. No brainer

Child tax credit:
Family element - £545/year per family, unless under 1 year old in which case it is £1,090/year
Child element - £1,845/year per child

Working Tax Credit:
Basic element: £1,730/year (maximum one per couple)
Couple's and loan parent's element: £1,700/year (maximum one per couple)
30 hour element: £705/year (maximum one per couple)
Child care element: 80% of childcare paid, up to £175/week (80% * £175 = £140 max) for care of one child, or £300/week if more than one child cared for. Both partners must work to claim tis.

Hence:

for one child, with no child care, the maximum benefits are:

£545 + £1845 + £1730 + £1700 + £705 = £6,525, or £7,070 if they are under 1 year old
and with two children
£545 + £1845 + £1,845 + £1730 + £1700 + £705 = £8,370, or £8,915 with an under 1 year old

Your income is then related to the Personal Allowance. You lose 37p in the pound for each pound above £5,220 in 2007-08.

Above £50k/year, you can only clame the £545 family allowance (£1,090 if you have a baby). This falls by £1 for every £15 above this level.

Sooooooooo:
For one partner earning £5,220, with no other income:
1 child: £6,525/£7,070 with baby
2 children: £8,370/£8,915 with baby

For two partners earning £5,220, you lose 37.1% = £1,931.40 of benefits.

If the second partner does not get paid you pay 21% in Corporation Tax on that money. If you eventually distribute via capital distribution, then that works out as 28.9%minimum tax payable. In other words, the second salary costs you at most, £422.82, in lost benefits.

Given the 37.1% tax rate on any income, it doesn't make sense to earn anything more than £5,220/year (remember that you are allowed unlimited capital for tax credits). This is true even though dividends come basic rate tax paid - you are effectively paying 37.1% tax on them. If you distribute income via dividends higher rate tax, then the rate would be 25%. And via capital distribution, only 10%.

There is really therefore no rational reason to earn any more than £5,220/year if you can help it. If you HAVE TO get more than this, then the marginal tax rate for the second income is only 9%, and you get the NI stamp for your spouse, so this would be the way to go.

**chris79** · 17 June 2008, 12:19

Quite an interesting post Dude69.

One of the advantages I think in paying a low wage is that if you ever find yourself 'on the bench' so to speak for a while through choice or not, it means that the funds in your company would keep you ticking over topped up through tax credits, in effect a bit of a security blanket there?

I almost see this as a possible means of early retirement if you were able to live off the calculated sums and accumulate enough funds in your business account.

Not that I'm suggesting a life on benefits is a morally correct thing to do, but exploring the options here it's certainly something not to simply dismiss when it comes to financial planning in terms of security.

**MPwannadecentincome** · 12 September 2008, 11:13

Originally posted by i-am-ltd View Post

Dear All,

Like many on this forum I am IT contractor working through my own limited company. I own 100% of the shares and take £24,000 pa and I employ my wife to the admin work and pay her £5,225 pa. We are expecting our first child shortly and I would like to know for which child & tax benefits we are eligible for.

Child Benefit
------------

I think this is paid to all parents (not means tested). For the eldest child £18.10 per week, is it correct?

Child Tax Credit
---------------
Families with children can claim Child Tax Credit if their income is no more than £58,175 a year (or up to £66,350 if you have a child under one)

So for the first year I can take £37,150 in dividends (£66,350 less our salaries (£24000+£5200).

So we can get £2,390 pa (family element £545 + child element £1,845) Is this correct?

Working Tax Credit
------------------

I dont think we will qualify, but welcome your views.

Please comment. Thanks.

You probably have found this out by now but in case not once you put your child into childcare you can use childcare vouchers upto £55 per week to save on tax and NI etc, this post here seems to contain all the right pointers....

http://forums.contractoruk.com/592701-post14.html

Benefits & Ltd Company