Understanding Notional Income
I am trying to understand notional income to work out what I can expect to pay for a side company that generates a revenue stream contain within an LTD.
- I work a full time job and currently pay around £600 PM in child support
- The money generated from the side business would remain within the business (I would take no salary/income from the business)
- All money generated within the LTD will be used to invest in other assets (i.e. owning property that generates rent, where all of the money is reinvested into more property).
- The business isn't yet set up as I am trying to figure out the best method of investment.
From what I understand 'notional income' is a calculation of income from non-income generating assets. It can be calculated on any single asset that is worth in excess of £31,250, and it is calculated on an assumed rate of 8%. (This results in an income of at least £2,500, which is the threshold for unearned income (such as rental income). Assets include things like gold bullion, cryptocurrency, and any 'money' (whether in cash or deposited in investments or savings accounts).
Does this mean the following sum (figures for example):
- I have a second property valued at £100,000.00,
- £68,750.00 is calculated as an additional 8% of earnings.
- Notional income of 8% = £5,500.00
- At a CMS rate of 12%, I would be liable to pay an additional £458.33 Per Annum in Child Maintenance (or £38.19 per month)
Is this correct? If down the line I decide to pay myself a salary from this business where the assets are held, do I pay CMS on the salary I make + Notional Income from the asset value?
Currently notional income/assets are only taken into account if your ex informs CMS that you have additional income and wants a variation. If you take a salary and dividends from your business, they get taken into account for paying CM. By default it seems that CMS only notice the salary element of LTD companies. Would be wise to declare dividends to avoid problems with CMS.
@bill337 Thanks for the feedback, Bill. This is very helpful.
I want to ensure I have read your comment correctly: the wise move would be to declare dividends from the company and let them calculate my total salary (LTD + day job) at the end of the year, rather than hanging about for my ex to find out and taking a variation?
Depends on whether you need the income from the dividends, if you are thinking if increassing your pension, now would be a good time to do it.
Hi @actd, thanks for the feedback.
The profit from the LTD is purely for reinvestment. This is very much a long game for me to expand an asset portfolio (property, stocks, and bonds).
I don't require any sort of personal payment/salary outwith the required dividends, and the dividend payments will be kept below the £2,000 taxable threshold.
In this example, what would be the outcome with CMS:
Will the CMS assess me on my next annual assessment at +£2,000.00 in income (I.E my full day job salary plus the £2.000.00 dividends), or will they consider the net profit of the LTD?
Sorry, the new dividend tax threshold was reduced from £2,000.00 to £1,000.00 in April. My apologies. The premise of my last comment remains the same, but I wanted to update the figure.
I'm afraid I don't know enough to give you an answer that you could use, hopefully someone on here will be better aquainted with running a Ltd company, otherwise your accountant may be best placed to advise on this
@dad1989 I think they will only assess on the dividend payment, plus your salary. However, your ex, if switched onto the Ltd company could say you are diverting income and ask for a variation based on that. CMS would then in theory look at your profits and include them in the total income assessment. But if ex is not switched onto it, I think only the dividends would be added.
@hrabbit Thanks for feeding in. The feedback from everyone is greatly appreciated. So from our reconning, profits would be assessed. I guess I need to make sure I keep reinvesting the money so my profit sheet is low.
From what I've read 'notional income' is a calculation of income from non-income generating assets. It can be calculated on any single asset that is worth more than £31,250, and it is calculated on an assumed rate of 8%.
Does this mean, any asset worth more than £31,250.00 CMS assumes this asset generates 8% profit (i.e. interest on savings), therefore, the CMS would charge me 12% (standard CMS rate) of the 8% assumed income?
Here is my math:
Asset value: £31,250.00
8% of asset value = £2,500.00 (assumed income)
12% of assumed income = £300.00 (or £25 per month)
Therefore, I would be liable to pay an additional £300.00 CMS Per Annum on an asset valued £31,250.00?
Or, does this mean that I have to pay 8% of the £31,250.00?
My calculation is based on what @Will99 pulled out in a similar thread
5.2 Notional income from non-income generating assets
From December 2018, the CMS has been able to calculate notional
income from a non-resident parent’s assets that are not generating
income; the CMS uses an assumed rate of interest of 8 per cent in the
calculation of notional income.
@dad1989 I believe 8% of the asset added to income. So the 300 per year. Of course assuming your ex requests it. They dont seem to add it automatically.
This is one of the problems i find, the inconsistency. I have had 2 years of my share awards being treated as assets, with the 8% value used, but this year they have decided it is income, even though I have received no net award. I am currently appealing this again. Just adds to frustration and inconsistency.
So I always tailor my advice to say it is what I believe, rather than being gospel, as always open to interpretation of different people at the CMS......
@hrabbit Thanks a lot for the feedback. This is far clearer.
I have had 2 years of my share awards being treated as assets, with the 8% value used, but this year they have decided it is income,
What does this mean for you? What changed in terms of your payments?