Reply to: Being tax efficient

[Alan @ BroomeAffinity]

Straying off topic slightly: It does seem strange that people are willing to engage in aggressive tax planning but not aggressive benefits planning. I'm certainly one. Even in times when I could easily have claimed income support, family tax credits etc, I never. You also hear people raging against benefits cheats but have no problem pocketing a few quid from a cash job and not declaring it.

[Ebenezer]

It could be argued that the way he operates is not only legally correct, but is morally acceptable as arguably he pays into the system and exploits it according to the rules when out of contract.

I don't operate the same way and I don't support the approach, but it's not in anything like the same ballpark as MP's special treatment of expenses (that would see any of us jailed for evasion if we tried) or people claiming and working at the same time.

I've read most of the JSA-related threads and I'm inclined to think that legal exploitation of the benefits system is perfectly acceptable. After all, most people are pretty keen on tax minimisation, and if you think of benefits as being a negative tax, it makes sense to maximise them.

[TykeMerc]

Whilst this may technically be within the law (or not I don't know), IMO this sort of behavior puts you on a moral par with MPs claiming urine extracting expenses and benefits scroungers.

It could be argued that the way he operates is not only legally correct, but is morally acceptable as arguably he pays into the system and exploits it according to the rules when out of contract.

I don't operate the same way and I don't support the approach, but it's not in anything like the same ballpark as MP's special treatment of expenses (that would see any of us jailed for evasion if we tried) or people claiming and working at the same time.

[b0redom]

Better off stop paying yourself and claiming JSA for 6 months.

Yes, potentially, you'll lose the tax free benefit of 6x £681 x 20% = £817. (Basically, assuming all money has been taken out of comapny before claiming JSA - always a good idea- then you'll have paid CT of 20% on it rather than having it later as tax free via salary).

BUT, £72 x 26 weeks of JSA = £1872.

And, if you start contract again before end of tax year you can double up salary to catch up. e.g. work apr-sep pay salary, no contract claim jsa oct-dec, so pay no salary. Back in contract jan, pay double salary (£1362) for last 3 months so total salary for year is same. No tax free income lost :-) and you've got nearly £2k in benefits whilst on the bench.

Only drawback is it does attact some tax for these three months which you have to pay. But when its all totalled when you do personal tax return it gets returned.

Done this myself - works fine.

Whilst this may technically be within the law (or not I don't know), IMO this sort of behavior puts you on a moral par with MPs claiming urine extracting expenses and benefits scroungers.

[GazCol]

Better off stop paying yourself and claiming JSA for 6 months.

Yes, potentially, you'll lose the tax free benefit of 6x £681 x 20% = £817. (Basically, assuming all money has been taken out of comapny before claiming JSA - always a good idea- then you'll have paid CT of 20% on it rather than having it later as tax free via salary).

BUT, £72 x 26 weeks of JSA = £1872.

And, if you start contract again before end of tax year you can double up salary to catch up. e.g. work apr-sep pay salary, no contract claim jsa oct-dec, so pay no salary. Back in contract jan, pay double salary (£1362) for last 3 months so total salary for year is same. No tax free income lost :-) and you've got nearly £2k in benefits whilst on the bench.

Only drawback is it does attact some tax for these three months which you have to pay. But when its all totalled when you do personal tax return it gets returned.

Done this myself - works fine.

Company has retained profits and you're claiming JSA to avoid paying tax? Couldn't that see you end up in the dock for both benefit fraud and tax evasion?

[Alan @ BroomeAffinity]

I didn't think it was THAT badly worded but I take your point. I was meaning the wife's salary needs to be earned/justified.

[jamesbrown]

Claiming JSA because you can't afford to support yourself is one thing - doing it as a tax dodge and money saving exercise is downright bloody pathetic.

Are you not familiar with psychocandy?

[vwdan]

Better off stop paying yourself and claiming JSA for 6 months.

Yes, potentially, you'll lose the tax free benefit of 6x £681 x 20% = £817. (Basically, assuming all money has been taken out of comapny before claiming JSA - always a good idea- then you'll have paid CT of 20% on it rather than having it later as tax free via salary).

BUT, £72 x 26 weeks of JSA = £1872.

And, if you start contract again before end of tax year you can double up salary to catch up. e.g. work apr-sep pay salary, no contract claim jsa oct-dec, so pay no salary. Back in contract jan, pay double salary (£1362) for last 3 months so total salary for year is same. No tax free income lost :-) and you've got nearly £2k in benefits whilst on the bench.

Only drawback is it does attact some tax for these three months which you have to pay. But when its all totalled when you do personal tax return it gets returned.

Done this myself - works fine.

Claiming JSA because you can't afford to support yourself is one thing - doing it as a tax dodge and money saving exercise is downright bloody pathetic.

[psychocandy]

Ok. I understand that.

I was worried that the suggestion was that I couldn't choose to pay myself a salary of 12 x £681 throughout the year if I was benched for 6 months of that.

I've taken the approach that I am employed by my Ltd and if there's no contract to go to for 6 months but my Ltd has money in the bank then I should pay my employees (me) even if all they can be doing is cleaning my car.

If I employed a driver and I had no contract to drive to, I'm sure he'd still want paid.

Better off stop paying yourself and claiming JSA for 6 months.

Yes, potentially, you'll lose the tax free benefit of 6x £681 x 20% = £817. (Basically, assuming all money has been taken out of comapny before claiming JSA - always a good idea- then you'll have paid CT of 20% on it rather than having it later as tax free via salary).

BUT, £72 x 26 weeks of JSA = £1872.

And, if you start contract again before end of tax year you can double up salary to catch up. e.g. work apr-sep pay salary, no contract claim jsa oct-dec, so pay no salary. Back in contract jan, pay double salary (£1362) for last 3 months so total salary for year is same. No tax free income lost :-) and you've got nearly £2k in benefits whilst on the bench.

Only drawback is it does attact some tax for these three months which you have to pay. But when its all totalled when you do personal tax return it gets returned.

Done this myself - works fine.

[Jessica@WhiteFieldTax]

Ok. I understand that.

I was worried that the suggestion was that I couldn't choose to pay myself a salary of 12 x £681 throughout the year if I was benched for 6 months of that.

I've taken the approach that I am employed by my Ltd and if there's no contract to go to for 6 months but my Ltd has money in the bank then I should pay my employees (me) even if all they can be doing is cleaning my car.

If I employed a driver and I had no contract to drive to, I'm sure he'd still want paid.

No problem with continuing salary if you are benched, subject to funds being available and so on.

[JRCT]

Yours is not a stupid question.

The statement is badly worded. The statement should read 'Salary must be justified. Dividends are a return on an investment'

Which means that your wife can hold shares and be rewarded if the company makes a profit but you cannot just pay her £xxk to avoid tax when she (commercially) does nothing or little to earn it.

In short, tax efficiency is not the same as taking the p.

Ok. I understand that.

I was worried that the suggestion was that I couldn't choose to pay myself a salary of 12 x £681 throughout the year if I was benched for 6 months of that.

I've taken the approach that I am employed by my Ltd and if there's no contract to go to for 6 months but my Ltd has money in the bank then I should pay my employees (me) even if all they can be doing is cleaning my car.

If I employed a driver and I had no contract to drive to, I'm sure he'd still want paid.

[tractor]

...

On the face of it this sounds like a stupid question, but what do you mean by 'earned'?

Yours is not a stupid question.

The statement is badly worded. The statement should read 'Salary must be justified. Dividends are a return on an investment'

Which means that your wife can hold shares and be rewarded if the company makes a profit but you cannot just pay her £xxk to avoid tax when she (commercially) does nothing or little to earn it.

In short, tax efficiency is not the same as taking the p.

[JRCT]

Near enough I guess. But for the salary to be allowable, it needs to be earned, whereas the divi doesn't.

On the face of it this sounds like a stupid question, but what do you mean by 'earned'?

[Craig at Nixon Williams]

Hello,
I have a question I would like to ask around being tax efficient, as I am not sure I am currently getting good advice from my accountant.

Scenario
2 directors (married) of a company
Company turns over 130k per year
If we wanted to take the most we can out of the company in a full tax year what would be the recommendation to achieve this through a combination of paye and dividends?
Company expenses are around 10k per year on average.

Thanks in advance
j

The most tax efficient plan for extracting funds from the company, as others have said, is to take a salary to the personal allowance and then dividends to the higher rate threshold. If you are married and your spouse has basic not used their entire basic rate band then you could extract more from the company each year by splitting your shareholding. If there is a difference between the salaries of you and your spouse, then the higher earning spouse could make personal pension contributions to equalise the higher rate threshold and extract more dividends from the company.

If it is the case that your cost of living requires you to take receive income in the higher rate tax band then paying tax at this level is unavoidable. However, if you do not need the cash immediately then keep to the basic rate tax band, let funds build up in the company and take it as capital when you cease to trade and the company can be closed - if you qualify for entrepreneurs relief then the funds will be taxable at 10%, giving you a significant tax saving. There is opportunity cost of this strategy in that if the cash was extracted immediately then it could be used to reduce the balance on your mortgage or earn a return for you in some other way. You should also consider the risk of changes to legislation surrounding this strategy as tax rules are constantly evolving.

Hope this helps!
Craig

[Alan @ BroomeAffinity]

This is CUK. Never apologise!

Got you. Sorry. Damn.