to think this tax loophole is wrong (if true)

[devon004]

Dh earns good money. We are just in the bracket to lose child benefit but have high commuting costs etc.
I have just been chatting to a friend whose dh is doing a similar role to my dh is considering taking on a new role for less money but is able to do it as a Ltd co. He will take a small salary and than claim dividends for the rest of the salary which is taxed at a lower rate so will take home the same but will get child benefit and can claim for travel
aibu to think this is bloody unfai if true.

The £10,500 PA is generally used as a salary because of the free NHI'ers of £2000.

huh?

Most company directors still use the NI starting point as the salary they pay themselves. Its simpler this way. Some will however use up the whole of their personal allowance and pay a little bit of NI. Often this will depend on their overall level of income.

This thread has gone completely off topic though. We're all banging on about how as directors we don't get favourable tax treatment (and we don't) but actually the OP was complaining about child benefit still being claimed when a person takes dividends rather than salary (which I think we've established doesn't work).

The two year thing that people are talking about for contracting work used to be a shortcut indicator of whether there might be an IR35 breach but it's clearly much more complex than that. The reality is however that if you worked for one business for circa 2 years as a self employed contractor then there is a good chance that you're going to be the subject of HMRC scrutiny. Less chance if you're working through a limited company but still a chance. I'm an employment lawyer and its one of the things I'm frequently asked to advise on.

Yes, the issue is always purely one of whether someone meets the test of being an employee or not (whether they are a sole trader as i am or operating through a limited company). I work for many different clients every day and bill 30 a month etc and clearly as no one's employee. I decide when and how I work, could in theory subcontract or use others to provide the work, set my hours etc etc.

Someone going into the same employer every day and controlled may well be classed as employed whether they have a limited company or are a sole trader but it does depend. I know HMRC do accept a lot of IT contractors who move from job to job particularly fairly short stints are clearly self employed whether they use a company or not.

I do not accept the main saving is only NI. Some people earning a lot are able to keep the money in the company paying corporation tax on profits at much lower rates than their personal tax and various things like that although that would not be much use to many of us as we need all the money out and when we take it out usually it's taxed. Other people can have a company owned by several relatives who all draw out dividends. Wasn't there a case called Arctic Systems on this?

Yes there are other things you can do. Some people will keep the money sitting in the company and only pay corporation tax on it. Then when they retire, they will take it out gradually and pay a lower rate on it (although the reality is that if they can afford to do this they probably have decent pensions which means they are still likely to be higher rate rate payers).

Some will employ family members and share out the income that way or else family members will be shareholders and they receive dividends. Doesn't tend to happen as much outside of marriage though because otherwise you're just giving away money.

However, if you do keep the money stacking up in the company you lose the massive advantage of a limited company i.e. the limited liability. Not much point limiting your exposure to what's in the company if you have all your worldly assets tied up in the company. Any professional services company in particular (or other advisory business) is likely to strip everything out on a very regular basis so that if they are ever sued there is nothing to be taken.

It's not a loophole, it is a legitimate way of organising a business. That said, if you only work for one employer and are effectively treated as an employee the rules say that you should be taxed as an employee, regardless of whether you are paid directly or through a limited company. If you are running a genuine business working for lots of people then there is a small NI saving to running the business through a limited company.

Acting as an employee but working through a limited company to save tax and hoping that you don't get busted is tax evasion, a crime, and you should go to prison for it.

I'm a chartered accountant (fellow) and a chartered tax adviser, for what it's worth.

To summarise, it really would not be worth the hassle (admin, professional fees, companies house filings, corporation and personal tax returns etc) of setting up a limited company to simply save on child benefit.

Ps...as pp said, setting up a company to run your business is NOT a tax loophole.

Interesting replies. Thank you. I am wondering whether they have misunderstood rules.

It all depends what tax loophole means. I think exploiting tax loopholes within the law is a moral good (which is not the view of most Governments who want a lot of tax revenue and a huge state and lots of power). People do set up companies to save tax but also for other reasons too.

Loads of IT contractors lawfully incorporate and move from temporary project to temporary project and are not employees. Others of them are employees.