Dividend payments

[batman]

What are the implications if I pay myself only dividends through out the year? I mean my sole income is dividend income? Are there any tax implications? Or do I need to set my company up for PAYE and pay myself a nominal amount?

Cheers

 

[JamesCartwright]

Dividends are taxed at a different rate to PAYE, and I believe there is no national insurance on dividends.

Some people save money this way - but you should really speak to an accountant first. Do you have one? I may be able to arrange a free meeting (or phone conversation) with a Chartered Accountant if you're interested (PM me)?

James.

 

[hendyphilhendy]

There are actually tax efficient ways of paying yourself through a company dependant on your circumstances. It may be better to pay a salary first up to the personal allowance (also try to ensure you are in the NI band so that contributions are paid).

Then pay dividends on top of that.

Like I said though other factors and income streams could affect this. Feel free to PM me if you want to discuss it further.

 

[Derick Price]

I have a Ltd company and have set up a PAYE at a level before tax (just below £500 pm), and take the remainder as dividends. There is no tax implication unless you take above £37,400p.a. in dividends after which point you will find a 22.5% bill above for incremental amounts - if you have a shareholder who can accept that dividend then the tax implication would reduce (company secretary for instance).

Obviously I dont know your business or circumstance but this has worked for me whilst building the business in the first 2 years, and I have a reputable accountant.

Remember that you will need to pay corporation tax on the company profit before you can take the dividend (20-21%).

 

[David Griffiths]

The main question to ask is if you have any other source of income, which is subject to tax.

If all of your income comes from this company, then drawing a dividend only means that you will pay more tax. The dividend is not tax deductible for the company, but a wage of £5720 would be deductible, saving £1,200, and you wouldn't pay personal tax as it's covered by your personal allowance.

In addition, pitching the salary at that level means that you would get credit for NIC contributions without actually paying anything.

If you have other earnings, then the situation is different

 

[Phil B]

A mix of salary and dividend is usually the best option and agreed it is dependent on your circumstances – also bear in mind that dividend income is not “income” for Pension purposes so only paying dividend would nail you ability to contribute to a pension in the future.

This can sorted with some planning – so it’s an accountant and an IFA for you!

Also consider that anything you can take from the company that doesn’t incur you tax personally will almost invariably incur tax on the company – have you looked at the Fixed Rate Car Scheme?

Phil B

 

[David Griffiths]

. . so only paying dividend would nail you ability to contribute to a pension in the future.

Not if the company pays the pension contribution directly as an employer's contribution.

 

[Phil B]

I stand corrected - does that give rise to a P11D (provided they are are a Director/Earn over £8.5k)?

Phil B

 

[David Griffiths]

I stand corrected - does that give rise to a P11D (provided they are are a Director/Earn over £8.5k)?

Phil B

In a word no. Pension contributions are an allowable expense for the company and not treated as a benefit in kind - repeating the point that it must be the company making the contribution.

All too often we see people set up personal pensions and then making the payment of the employee's net contribution from the company. Employers pay contributions gross.

 

[UKSBD]

I know it is common practice and has been happening for a long time,
but can anyone answer why exactly that there are no NI contributions
on money taken out as dividends?

What is the definition of what income does attract NI contributions and
what income doesn't?

TIA.

 

[David Griffiths]

National Insurance is levied on earned income

Dividends aren't earned income.

 

[UKSBD]

Thank you.

So if a company director is working 40+ hours a week, only paying himself
£6,000.00 a year, but claiming a £30,000 a year dividend could that not
be seen as borderline fraud?

 

[Phil B]

Nope! HMRC have attacked a similar point a couple of years ago relating to non working spouses and it has all gone very quiet since they Won - personally i think they have a problem with enforcement.

There is tax still to pay though in the company - it is not a free ticket. the trick is to pay more Corporation Tax but less Income Tax/NIC - overall you pay less but it is not a "tax free" option!

Phil B

 

[UKSBD]

Thanks, I know all that, and know it is common practise.
But would like to know more about the history of it?

i.e.
how long it has been happening, who was the first person to find the
loophole, which bit of wording of the legislation they are using for
the loophole etc.?

I know accountants recommend doing it, but on what basis are they
making the recommendation? Is there a particular judgement anywhere,
or do they just make the recommendation because other accountants
have done so in the past?

 

[Phil B]

Accountants are not making a judgement - they are applying tax law!

Phil B

 

[elaine@cheapaccounting]

This has existed for as long as NI is on earned income and not on unearned.

It is not a loop hole, not border line fraud, not wrong, not an idea of an accountant etc

 

[UKSBD]

Yes, but which law are they using?

What is the a particular part of the legislation that is creating this?

When was it first found (and was it a particular person or company of
accountants) and which court case set the precedence?

Are we going back decades or centuries with the use of dividends as a
way of avoiding NI contributions?

I really am intrigued that something like this that can cost the goverment
£7k per shareholder hasn't got more of a history to it.

 

[David Griffiths]

The law hasn't changed. Tax rates have changed, NI rates have changed, Advance Corporation Tax was abolished. Most of us have quite enough to do with applying the laws as they stand. Personally, I don't give a stuff what the rules used to be or how and when they changed.

 

[UKSBD]

Who tells you to tell clients to pay themselves dividends rather than
wages? Is it via trade journals, word of mouth, Accountants Guidelines,
reading secific judgements etc.?

Although Elaine says it isn't a loophole, somebody must have originally
spotted that it was a good way of reducing tax liability and then
circulated their findings to all other accountants.

 

[taxattack]

Yes, but which law are they using?

What is the a particular part of the legislation that is creating this?

When was it first found (and was it a particular person or company of
accountants) and which court case set the precedence?

Are we going back decades or centuries with the use of dividends as a
way of avoiding NI contributions?

I really am intrigued that something like this that can cost the goverment
£7k per shareholder hasn't got more of a history to it.

The main legislation regarding NI is the Social Security Contributions and Benefits Act 1992, which identifies the various classes of NI, and who must pay them. In general, as David Griffiths has said, they apply to earnings.

Dont forget that it is shareholders rather than directors who are entitled to dividends, (although they are often the same person). Dividends are taxed under the Income Tax Act 2007.

Chris

 

[MrPAYE]

Who tells you to tell clients to pay themselves dividends rather than
wages? Is it via trade journals, word of mouth, Accountants Guidelines,
reading secific judgements etc.?

To support the gist of other comments, the advice provided to clients around the most tax efficient way to be paid is driven by legislation. It is the adviser's knowledge of the legislation and the experience of being able to apply this knowledge in practical, legal, and effective ways that "tells" them how to advise their clients.

If it was as simple as getting the answer out of a book then there would be no need for tax advisors now would there ??

 

[Homshaw]

I suppose for small one man companies putting NI on divis would solve a lot of avoidance but divis are also paid to people who have invested in large companies where the nature of the divi is moving towards being more like an interest payment in nature. There would never be a possibility of a salary. If you pay NI on these would you pay NI on savings. There are so many grey areas in between it would be difficult to try and divide limited companies into categories.

There is no NI on rental income either yet what is the difference between renting out houses or any other business