Director payments and dividends - advice required

[Tony Carter]

Hi guys

Okay, a couple of weeks ago I sent the following query to my accountant:

Up to the end of January 2017, I had been running my writing business with the wife (both of us being directors of the company), and both of us taking out the ‘minimum wage’ [£680 pm] from the business and the rest in dividends. At the end of January, the wife 'left' the company to do other things and was subsequently removed from payroll.

From beginning of July, she is coming back to work ‘full time’ for the business. However, I actually want her to be paid the same as I pay my freelancers and to receive a wage every month (which will not be same every month as it depends on how much she will manage to write in any particular month). At the end of the day, why pay a freelancer when the wife can do it? So, whereas before when she was working full time in the business we both ‘took’ £5K per year (or whatever the minimum allowable was) and the rest out as dividends, this model of pay didn’t really suit us as it ended up us taking money out of the business as and when we needed it, meaning we really had no clue what was going on, which was bad all round (and probably meant we took more than the dividends allowed, but that's another story for another day).

So, for arguments sake, say she wrote enough each month for me to pay her what any other of my freelancers might earn, so, for example, 2K per month, what is your advice on the best way to do this (think tax implications, etc.) for both the business and her personally?
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The accountant's reply basically said to still go down the minimum allowable monthly and the rest in dividends - £680 wages and £1,320 dividend = £2,000 monthly. But my issue is this: I am convinced that the business does not make enough profit to justify her suggested dividend and my own - £680 wages and £1,820 dividend (it is a new accounting firm I hired who have yet to do their first year-end for me, so they wouldn't know the current state of affairs to let me know for sure).

Let's say there is not enough profit to justify that sort of dividend payment, is there any other tax-efficient way we can play this (with the wife's payment, that is)?

 

[Scalloway]

If you both have shares in the company you will both receive dividends. Shareholders can waive their right to dividend but it is complicated.

https://www.taxinsider.co.uk/1611-Dividend_Waivers_Beware_The_Pitfalls.html

 

[Clinton]

Would your wife be writing just for you or taking on other writing assignments as well?

If you are her only client then how do you intend to argue that she's not an employee who should be on the payroll?

 

[Tony Carter]

Would your wife be writing just for you or taking on other writing assignments as well?

If you are her only client then how do you intend to argue that she's not an employee who should be on the payroll?

We are both directors of the company, so she wouldn't be working for me. All she will be doing is taking on some of the work freelancers would have otherwise done (she writes, I edit, so both technically 'employees' of the company in that respect). As I said, better for her to get that money than dishing it out to freelancers. So therein lies my problem - the money she could potentially earn doing this would, in my opinion, take us out of minimum allowable wage plus dividend sphere. This is what I need advice on (I suppose we could rephrase the question I asked to "how can I deal with the tax implications of going over minimum allowed wage + dividend when company hasn't made enough". (So, if we are both allowed, for example, £680 pm wages + [for the sake of argument] 15K dividend each, but in fact the wife's 'wage' for the year took us £5K above what the dividend could support).

I'm not sure if I have explained this properly, but as you can guess, accounting is not my strong point ...

 

[Clinton]

You do realise that dividend is paid only out of accummulated profits?

So you can pay a dividend only if you have profit from last year .... or you have solid up-to-date current accounts which give you a clear idea of how much of profit you've made to date in the current year.

That's not suited to a model where:

we really had no clue what was going on

BTW, I still think your set up will be seen as fiddling HMRC out of PAYE and NI, but my expertise is not payroll so I'll let one of them lot explain them things

 

[STDFR33]

Your accountant needs to do the calculations.

You can pay your wife a salary equivalent to that of a freelancer, but you will pay more in tax than is legally necessary.

Your accountant needs to talk to you to understand what you need to maintain your lifestyle, the profits of the business etc and work out an efficient remuneration strategy for you and your wife.
They should also explain how dividends are declared and the benefits etc.
This is bread and butter stuff.

BTW, I still think your set up will be seen as fiddling HMRC out of PAYE and NI, but my expertise is not payroll so I'll let one of them lot explain them things

It's called tax planning.

 

[Clinton]

It's called tax planning.

I was thinking more in terms of IR35. But, like I said, not my area of expertise.

 

[NicoJ]

I was thinking more in terms of IR35. But, like I said, not my area of expertise.

IR35 would not apply as (if I've read the post correctly) the wife will be paid through PAYE as an employee of the company.

 

[Clinton]

OK, maybe I read it wrong. I understood that he wanted to pay her like he would pay a freelancer.

 

[DontAsk]

If the company pays more salary then it makes less profit and NI becomes payable.

If the company pays less salary then it has more profit and can pay up to £5K dividends (was set to reduce to £2K in the budget but was dropped form the finance bill) with no tax (if the allowance is not used by dividends from other sources). The company must be solvent enough to pay the dividends.

You, or your accountant, need to do the math.