Claiming working/child/tax credits/other benefits by paying small salary/dividends?

[JohnDoe]

I am a contractor with my own Ltd Company. I normally pay myself a small salary + dividends to keep myself just under higher rate threshold. I normally make a large profit which I keep in the company or else I have to pay higher rate tax.

I read a thread on another forum about a contractor who takes a very low salary (I think it was £8k) and paid himself very few dividends during the year so he ended up with total income of less than £15k. He then claimed both working tax and child tax credits which also entitled him to various benefits (free school meals, housing benefit, council tax benefits, child benefit etc). He said this was totally legal but I am not sure as wouldn't this be a case of deprivation of income?

I found this on the HMRC website; TCTM04800 - Notional income: Contents

Not sure if any of the situations listed applies to a Ltd Company contractor who is taking very little in salary/dividends in order to claim benefits.

I would like to hear other contractors views/experiences. Thanks!

[psychocandy]

I am a contractor with my own Ltd Company. I normally pay myself a small salary + dividends to keep myself just under higher rate threshold. I normally make a large profit which I keep in the company or else I have to pay higher rate tax.

I read a thread on another forum about a contractor who takes a very low salary (I think it was £8k) and paid himself very few dividends during the year so he ended up with total income of less than £15k. He then claimed both working tax and child tax credits which also entitled him to various benefits (free school meals, housing benefit, council tax benefits, child benefit etc). He said this was totally legal but I am not sure as wouldn't this be a case of deprivation of income?

I found this on the HMRC website; TCTM04800 - Notional income: Contents

Not sure if any of the situations listed applies to a Ltd Company contractor who is taking very little in salary/dividends in order to claim benefits.

I would like to hear other contractors views/experiences. Thanks!

I guess theres nothing stopping you only paying yourself a total of £15K salary and dividends. As a company director you're within your rights to pay salary and dividends as you see fit I guess.

Is it really worth it though the amount of tax credits you get? Coupled with the hassle of living on £15K a year. Of course, if you're partner works as well you're screwed.

I did know someone who did one of these dodgy offshore scheme things. Made a mint and still claimed tax credits somehow- taking the piss a bit this mind and it'll probably all go tits up for him sooner rather than later.

[Support Monkey]

been claiming it for the last 6 years no problem i pay NMW and then take dividends, if you earn around the 20 thousand mark its around £180 a month in tax credit, my son was also able to claim EMA for college when that was availble.

so it can be claimed and its based on earnings not profits, having said that my wife does not work but my overheads are minimal i can SURVIVE quite happily on that but then i am running around in a V plate renault Clio

so it all depends on if you think its worth it for the amount you can get and if you can live on that level of money.

and before we get the "its morally wrong Brigade harping on" my current contract see me regularly sitting in a building where the great unwashed and foreigners come to make there claims for benefits, a few hours in there and you will realise how people are taking the benefits system to the cleaners everyday, its the system thats in place thats at fault so work it to your advantage, everyone else does

[JohnDoe]

Thanks for your replies. I worked out that on a total income of £15k (made up of salary and dividends) our household would be entitled to the following yearly benefits;

child benefit: £1762
child tax credits; £15907 (working and child)
council tax benefit: £1080
housing benefit: £11,313
plus free school meals, prescriptions etc.

Approx £30k

So add that to the £15k

Total income of £45k most made up of benefits

[northernladuk]

Don't forget you still have to take all this money you have been 'hiding' in your LTD at some point so are going to get stung for tax at some point. If you let it grow too big and start breaking the next tax thresholds you could be looking at paying top rate tax because you didn't spread the payments better earlier on.

You are not looking at the bigger picture.

[jmo21]

been claiming it for the last 6 years no problem i pay NMW and then take dividends, if you earn around the 20 thousand mark its around £180 a month in tax credit, my son was also able to claim EMA for college when that was availble.

So you gain £180 * 12 = £2160 per year.
What does the EMA amount to?

With compounding and decent savings accounts (ISA, fixed term)/investments and compounding interest, surely it would be better to get the money out and have it earning over the years.

Presumably you are planning to use the close company, pay 10% tax route at some point?

[northernladuk]

Presumably you are planning to use the close company, pay 10% tax route at some point?

Isn't this route dead and buried now? Liquidating your LTD wouldn't give you this tax break now would it?

[Greg@CapitalCity]

Isn't this route dead and buried now? Liquidating your LTD wouldn't give you this tax break now would it?

Not dead and buried, but it has become more expensive. Instead of sending a letter to the HMRC for ESC C16 treatment (for free), the contractor will need to pay for a members voluntary liquidation. I have seen prices around the £2,500 - £3,500 + VAT mark for this. By my estimation, if retained earnings exceed around £50,000, then the most tax efficient option is to go down the members voluntary liquidation route.

[blacjac]

so it can be claimed and its based on earnings not profits

Maybe, but you do have to declare your dividends as earnings on the annual review, so really, what is the point in keeping your income so low?

[northernladuk]

Not dead and buried, but it has become more expensive. Instead of sending a letter to the HMRC for ESC C16 treatment (for free), the contractor will need to pay for a members voluntary liquidation. I have seen prices around the £2,500 - £3,500 + VAT mark for this. By my estimation, if retained earnings exceed around £50,000, then the most tax efficient option is to go down the members voluntary liquidation route.

Do we know what the tax rate for this would be? Same as Capital Gains?