Query on Earnigns for ILR as a Limited company director

[bunti716]

Hi All,

I would be greatful to you if you could give me an advice. My situation will be the same as most of the freelancers. I am a freelancer and had a Limited company. I am the only Director for my comapny. My ILR due is in Mar 2012. Still long way to go but I have to take some precautions about my earnings now.

I get my earnings as a salary and dividends. I take very little as a salary (roughly around £500 per month) to avoid NI and Income Tax. Rest I take them as dividends. But the problem is, I regularly take some amount from my business account as a advance. Once my salary and dividends are declared, I take the remaining balance from my business account. So my payslips, dividend vouchers dont match with my bank statements. Here are the list of my questions. Please give me advice

• As per UKBA, I have to show two proofs for each earnings. That means I have to show Two proofs for my personnel salary and two proofs for my Dividends. What proofs can I show in my case. As said above, my payslips, Dividend vouchers dont match with Bank statements
  
  Presently I am not paying any NI. Because, I am paying myself below the NI threshold as a salary. I am submitting PAYE/NIC for every quarter as Nil. Will it be a problem
  
  I was unemployed in year 2009. I did not have P60 for that year. Will it be a problem
  
  I need to show my earnings minimum £35,000 to qualify. At present my earnings (i.e. my company turnover) is around £41,000. But as a limited company, They do consider only salary and dividends. But dividends are declared on net profits (i.e. My company income-expenses-salary-corporation tax). If I exclude all my expenses, corporation tax from my earnings, my earnings will fall below £35,000. Can you please advise me what to do on this case
  
  I have two dependents (wife and daughter). I heard that, I need to show atleast 2 years address proofs for my wife. But unfortunately, all bills are on my name and no bills on her name. She had a bank account. But did not have all bank statements in last year.

Though I have almost a year time, I am worrying about these new rules. Could someone please guide me what to do.

Thank you very much
Bunti

[John]

Dividend vouchers dont match with Bank statements

Maybe you should get more organised, and ensure that they do match for the next year! Don't continue to "steal" the company's money!

As regards the earnings, and dividends, what are you counting? The amount of the dividends? Or the amount of the dividends and the tax credits shown on the dividend vouchers?

No NIC? Not a problem, unless IR35 is in play.

[ilrjune11]

I am in similar situation as yours. Posted my query but didn't get any response as they might be silly questions. I spoke to a few people and did some research online and now I am kind of expert on Ltd co matters.... (just kidding). Will try to answer your queries...

...But the problem is, I regularly take some amount from my business account as a advance. Once my salary and dividends are declared, I take the remaining balance from my business account. So my payslips, dividend vouchers dont match with my bank statements....

Stop taking advance!! Thats what I once planned on doing and my accountant told me not to go that way as that is not viewed too favourably by HMRC too and it could land you in trouble in future.

As per UKBA, I have to show two proofs for each earnings. That means I have to show Two proofs for my personnel salary and two proofs for my Dividends. What proofs can I show in my case. As said above, my payslips, Dividend vouchers dont match with Bank statements...

IMO (and thats what I am planning on doing) the two proofs could be dividend voucher / salary slips AND bank statements. In addition you can also include a letter from your accountant mentioning the amount of salary and dividends taken. As I said, you should stop taking advance (and try to return the amount you already took, back to your company) and that way your bank statements should match your dividends + salary. In case you still need to take advance from your company, DON'T take it along with salary + dividends. Make a separate withdrawal and in that case you would still be able to show the exact amount (as salary / dividend) in your bank statement.

...Presently I am not paying any NI. Because, I am paying myself below the NI threshold as a salary. I am submitting PAYE/NIC for every quarter as Nil. Will it be a problem...

That should not be a problem imo as thats the whole reason of taking the extra pain in setting up a limited company and doing the extra paperworks (compared to salaried PAYE). Keep corporation tax acknowledgment letters just in case.

..I was unemployed in year 2009. I did not have P60 for that year. Will it be a problem...

Did you have your company back then? If yes, did you continue taking salary from your company? If you did then you should have a P60 from your company. Your accountant should provide that. Moreover, I don't think there is a requirement for a person to be employed continuosly while on Tier-1. IMO it depends on how the caseworker see it and also you should be economically active AT THE TIME OF ILR APPLICATION. I am not too sure about it though. Others may be able to throw more light on this issue.

..I need to show my earnings minimum £35,000 to qualify. At present my earnings (i.e. my company turnover) is around £41,000. But as a limited company, They do consider only salary and dividends. But dividends are declared on net profits (i.e. My company income-expenses-salary-corporation tax). If I exclude all my expenses, corporation tax from my earnings, my earnings will fall below £35,000. Can you please advise me what to do on this case ...

Not too sure on this. Perhaps you could try returning the director's loan (Advance) you took from your company. Your accountant / oher forum members should be able to guide you more.

..I have two dependents (wife and daughter). I heard that, I need to show atleast 2 years address proofs for my wife. But unfortunately, all bills are on my name and no bills on her name. She had a bank account. But did not have all bank statements in last year.
...

You could try providing copy of tenancy agreement (should include yours and your wife's name), copy of council tax bills, letter from NHS / Surgery etc.

[ilrjune11]

...As regards the earnings, and dividends, what are you counting? The amount of the dividends? Or the amount of the dividends and the tax credits shown on the dividend vouchers?..

Hi John, for the purpose of calculating earnings (to score points) I am considering GROSS salary and NET dividend (Not taking tax credit into account). Is that right?

[John]

I am considering GROSS salary and NET dividend (Not taking tax credit into account). Is that right?

No, that is not right. For tax purposes your income is your gross salary, plus the dividends and the tax credits attached to those dividends.

UKBA do not adopt a different method concerning how income is calculated.

So, for example, and I do not expect exactly these figures to apply to you, if your gross salary is £5500, and the net dividends received in the year total £27000, your gross income for tax purposes is £5500 + £27000 + £3000 tax credits on those dividends = £35500.

Does that help?

[ilrjune11]

Thanks John. That does help. I know when it comes to salary UKBA considers the gross figure but I couldn't find any info on whether they consider the gross or net dividend. To be on the safer side, I thought I would only take into account the net dividend so that there is no chance of rejection. In short, what comes into out bank account is the net dividend but when calculating point we need to consider the tax credit too which is...

Gross dividend = Net Dividend / 0.9. Is that right?

Thanks again.

[John]

Gross dividend = Net Dividend / 0.9. Is that right?

Yes

This HMRC webpage might help, in particular :-

The dividend you are paid represents 90 per cent of your 'dividend income'. The remaining 10 per cent of the dividend income is made up of the tax credit. Put another way, the tax credit represents 10 per cent of the dividend income.

So for you, based upon what you have posted, your income consists of your salary, plus your "dividend income, and your "dividend income" is made up of "the dividend you are paid" plus associated "tax credit".

[bunti716]

To John & ILRJun11,

Thank you very much for your advices. The information was very helpful. As you suggested, I will be more organised from now onwards.

ILRJun11, I think your ILR is due in June. As we both are on same boat. Could you please share your experience after you ILR.

Thanks again.

[dehjet]

Hi Guys, I am in the same situation , will it be a problem to give yourself a salary around 500£ to avoid NI ? should we increase the salary ?

[John]

£500? £500 per what? Year? Month?

In any case you should have regard to the extent of the NI "nil rate band", which is now £136 per week for employers and £139 for employees.

As a Director that is an annual pay period for NI purposes. So if the person is a Director for the whole year ...... 52 x £136 = £7072 per year ... could be paid as Salary, Bonus etc. without any liability for NI, either on the employer or the Director. Not only that, any such payment to the Director will reduce the amount of Corporation Tax payable by the company.

£7072 / 12 = £589 per month could well be the ideal salary to pay the Director.

[destiniation_london]

£500? £500 per what? Year? Month?

In any case you should have regard to the extent of the NI "nil rate band", which is now £136 per week for employers and £139 for employees.

As a Director that is an annual pay period for NI purposes. So if the person is a Director for the whole year ...... 52 x £136 = £7072 per year ... could be paid as Salary, Bonus etc. without any liability for NI, either on the employer or the Director. Not only that, any such payment to the Director will reduce the amount of Corporation Tax payable by the company.

£7072 / 12 = £589 per month could well be the ideal salary to pay the Director.

That was quite helpful, thanks John...Just out of curiosity, could you please tell me the link you refer or get these informations from like 136£ for employer...i was not aware of that figure...it would be interesting to read it ..

[John]

The figures come from this HMRC webpage, where you will see a Primary Threshold of £139, which relates to the individual, and a Secondary Threshold of £136, which relates to their employer. Those figures are the weekly amount.

By the way, you really do need to get used to writing British currency correctly! The pound sign is always written before the numbers. 136£ = wrong .... £136 .... correct.

[destiniation_london]

By the way, you really do need to get used to writing British currency correctly! The pound sign is always written before the numbers. 136£ = wrong .... £136 .... correct.

Thanks for correcting me. I'll keep that in mind.

[dehjet]

thanks john, i was asking for per month. i agree with your calculation and it is ok from tax side but i was wondering if it would be a problem with home office.in addition for the new tax year this allowence is now

Tax free Allowances £7,475.00 £622.92 £143.75

year/month/week

so one can pay up top 622 pounds with no tax and rest can be dividends

[John]

dehjet, you can of course £622 per month but if you do that there might well be some liability to NI, for both the Director and his/her company.

so one can pay up top 622 pounds with no tax and rest can be dividends

Probably yes, but do ask your Accountant about the tax legislation commonly known as IR35. (This is an immigration board and it is not appropriate for there to be detailed and technical tax discussions on this board about IR35.)

[intgral]

No, that is not right. For tax purposes your income is your gross salary, plus the dividends and the tax credits attached to those dividends.

UKBA do not adopt a different method concerning how income is calculated.

So, for example, and I do not expect exactly these figures to apply to you, if your gross salary is £5500, and the net dividends received in the year total £27000, your gross income for tax purposes is £5500 + £27000 + £3000 tax credits on those dividends = £35500.

Does that help?

Hi John - great answer, but even though calculating the gross income by adding the gross dividend is fairer, wouldn't be fairest if for contractors the income is calculated as the total gross billing? Such as rate per day x number of days worked and billed?

If we need to compare apples with apples, an employee can calculate into the income various allowances that can be cashed (car, city, etc.), but all of these are already included in the contractor's rate, right?

What do you think? Has anyone argued this favourably with UKBA?

Thank you.

[John]

What do you think?

I think that your argument has some logic, but it disregards what the contractor is doing, namely, operating their business through a Limited Company.

Also, what about the expenses that need to be incurred in earning the profit? I fear you are trying to disregard those expenses.

Also we must not assume that relevant visa holders are actually contractors. They might be operating a totally different type of business. It could be anything, even a retail shop, where gross receipts will be far in excess of net profit.

[intgral]

I think that your argument has some logic, but it disregards what the contractor is doing, namely, operating their business through a Limited Company.

Also, what about the expenses that need to be incurred in earning the profit? I fear you are trying to disregard those expenses.

Also we must not assume that relevant visa holders are actually contractors. They might be operating a totally different type of business. It could be anything, even a retail shop, where gross receipts will be far in excess of net profit.

For Sole Traders and Sole Directors of Limited Companies, the gross receipts should be counted as their income. The expenses in such cases are limited to £3,000 per year regardless of their type of business.

In very rare cases, bordering Tier1 Investor, if the business has more than a Sole Director, the gross receipts should still be the income of the individual even though it is running the business. For example, I couldn't possibly imagine that running a non-profit business, which would have close to 0 profit, be counted as owner's income, right? So it must be the gross receipts that need to be counted as UKBA income.

For the employees, the gross income would be their reportable UKBA income as usual.

Not only that, but referring more specifically to the majority of cases, Sole Traders and Sole Limited Company Directors are taking a risk working on a shorter term assignment and this risk is compensated by a higher wage.

As far as the larger economy goes, these are the type of jobs that bring it up to speed after a downturn, so appreciation must be surely given.

I see this as a fair point and I would like to address this with UKBA. What email address is best to use for this type of question?

Thank you.

[John]

The expenses in such cases are limited to £3,000 per year regardless of their type of business.

Interesting. The source of that £3000 figure?

[intgral]

The expenses in such cases are limited to £3,000 per year regardless of their type of business.

Interesting. The source of that £3000 figure?

I am not an expert. As I read, this is the max allowed on Schedule E, from here


Regardless of this, my point is that Sole Traders and Sole Directors should be able to have the gross receipts considered as UKBA income.

Is there an email address at UKBA I can ask for clarification and sustain this point?

Thank you.

[John]

my point is that Sole Traders and Sole Directors should be able to have the gross receipts considered as UKBA income.

Oh right, so someone operates a shop and their gross takings are £150000, but their net profit is only £25000. You really think UKBA should consider £150000 as the person's income? Of course not.

The fact is that those that operate a business, either as a sole trader or through a limited company, will by definition incur expenses. And those expenses will reduce income.

As regards the figure of £3000 you mention, there is nothing in tax law to apply such a limit.

[intgral]

Although you are generally right, you are off the topic. We are discussing contractors, not a general shop; see the first post.

As a contractor if one makes £400/day and works 6 months that should be 21 days x 6 = 126 x £400/day = £50,400 which should be counted as income for UKBA purposes. This compensation includes all benefits, days off, car, NI, taxes, location, etc. It makes sense to me to have it compared equally with a regular employee's gross salary plus allowances. Otherwise we need to compare net with net, but many of us will lose out that way. The idea is to make it easier to reach the minimum points, not harder.

I was still asking for an UKBA email where I could send my view, but perhaps someone else may have it.

Thanks.

[goldfish]

intgral, if you consider the revenues of your limited company to be your personal income, presumbly you are happy to pay tax at PAYE rates on your total invoiced amount?

A limited company is legally separate from its employers and directors, which is one of the key advantages of a limited company. If you don't want to be considered separate, don't operate a limited company.

[intgral]

I am only discussing the limited company directorship where there is only one Director (Sole Trader) and no employees, except perhaps a Secretary; see the first post.

The HMRC designed the lower taxation model to encourage entrepreneurship because it takes significantly more risks. From that perspective it would be most appropriate to compare similar pay packages by taking in consideration the gross revenues of a contractor in the market.

This is a good site to learn more about contractors:

http://www.contractorcalculator.co.uk

We may agree to disagree, but I think it is very fair.

I am still looking for that UKBA email to ask them their views. If it's positive, it can only help more individuals. If it's negative, all remains the same.

Thank you.

[zahid.ali.anwar]

I have recently started my Limited Campany. So don't know much about it. I was working as employee in the Past and due to redundancy I have to leave my high paid job. But found potential in market and started my limited company.

Now, for the purpose of salary drawing, John has explained everything. My question is do I have to register my Ltd company with HMRC as PAYE? If so, If I decide to take salary every month from my ltd company and not dividends, will this work?

Mean to say, that I join my limited company as employee and start taking salary as I was taking from my old company. Is this type of employment acceptable to UKBA or I HAVE to take min salary and dividends income from my limited company.

Secondly I am looking for a good accountant in Manchester area. Obvioulsy he should fulfill the rigirous requirement of UKBA . if any one knows one, please refer me one through personal message....I will be grateful, Thanks,