Dividends v Salary

[PJD]

Hi

Can somebody tell me if my understanding is correct on something please?

I'm trying to work out the best way for a director to pay themselves, tax wise. Should they take a small salary of say £5k in order to avoid paying tax and NI and then take the rest as dividends? Would these dividends then be taxed at 10%? Can dividends be paid each month or does it have to be yearly? Would they just go through the P&L as an expense?

Would they then have to declare these dividends on a self assessment return at the end of the year? Do you have to be a director to receive payment in this way?


Thanks in advance for any tips.

 

[itaufait]

taxcafe sell a reasonably good book that explains salary and dividends... AFAIK, you have to be a shareholder to receive any dividend...

 

[CassioAcc]

There will be no futher tax to pay on the dividends if the total income is under the higher rate earnings level.

 

[primeaccounts]

Hi

Although you should discuss your individual circumstances with your accountant as there could be other things to take into account that you may not be aware of. In simple terms it would be efficient tax planning to take a low salary then the rest as dividends and assuming you do not go into higher rates of tax you would not have any further tax charge personally. Although you are right dividends are taxed at 10% until you get into higher rates of tax but you would receive a 10% tax credit with the dividend.

You can pay a dividend, monthly or otherwise as you see fit but you must ensure it is properly documented with minutes and a dividend voucher.

It is not however a business expense and does not show in the profit and loss account.

You must have sufficient distributable profits to pay the dividend, including after making a provision for Corporation Tax.

Hope thats of some help!

 

[becker]

Hi

Can somebody tell me if my understanding is correct on something please?

I'm trying to work out the best way for a director to pay themselves, tax wise. Should they take a small salary of say £5k in order to avoid paying tax and NI and then take the rest as dividends? Would these dividends then be taxed at 10%? Can dividends be paid each month or does it have to be yearly? Would they just go through the P&L as an expense?

Would they then have to declare these dividends on a self assessment return at the end of the year? Do you have to be a director to receive payment in this way?


Thanks in advance for any tips.

As already pointed out - you don't have to be a director, but you do have to be a shareholder.

Traditionally, directors of small firms generally pay themselves a small salary and take large divends to minimise the NI payable.

However, recent changes in the rules have made this a risky strategy depending on the line of work you're in.

In particular IR35 and IIRC S660.

These HMRC rules mean that they will probably consider you to be taking the mikey if you pay yourself a salary of £5k and divs of c>£20, as who can live on £5k a year.

Really you need to be paying yourself a decent living wage - eg: c£20k a year - someone could live on that OK(ish) and then pay the remainder as divs.

It all depends how risk adverse you are - if you don't care if the HMRC come calling, then go for it, otherwise I'd recommend not drawing attention to yourself or your business. Also, best to seek the advice of a good accountant.

 

[PJD]

Hi

Could you elaborate a bit on the last comment please, I don't fully understand it. I understand that the HREL is £36k at the moment, how does that work?

 

[elaine@cheapaccounting]

There is no problem with paying a small salary and taking the rest as dividends. There is no new laws brought in which may this illegal or anything.

As suggest best to discuss your circs with an accountant.

Read this on dividends:

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnSavingsAndInvestments/DG_4016453

 

[deniser]

In particular IR35 and IIRC S660.

These HMRC rules mean that they will probably consider you to be taking the mikey if you pay yourself a salary of £5k and divs of c>£20, as who can live on £5k a year.

Really you need to be paying yourself a decent living wage - eg: c£20k a year - someone could live on that OK(ish) and then pay the remainder as divs.

I haven't read the rules you refer to yet but what if you don't need a salary more than £5k because you have other income? Is it still OK to take the bulk as dividends? Our accountant told us to do this.

 

[elaine@cheapaccounting]

I haven't read the rules you refer to yet but what if you don't need a salary more than £5k because you have other income? Is it still OK to take the bulk as dividends? Our accountant told us to do this.

Generally Yes it is fine. if you are concerned about IR35 check out the sites and have your contract checked:

http://www.pcg.org.uk/cms/index.php

If you are not a contractor or similar then it is probably not relevant at all

 

[Kent Accountant]

However, recent changes in the rules have made this a risky strategy depending on the line of work you're in.

In particular IR35 and IIRC S660.

These HMRC rules mean that they will probably consider you to be taking the mikey if you pay yourself a salary of £5k and divs of c>£20, as who can live on £5k a year.

Really you need to be paying yourself a decent living wage - eg: c£20k a year - someone could live on that OK(ish) and then pay the remainder as divs.

Sorry but this is not good advice. Subject to IR35, it is quite acceptable to pay a £5K salary and have the rest in dividends provided you document it properly

 

[becker]

Sorry but this is not good advice. Subject to IR35, it is quite acceptable to pay a £5K salary and have the rest in dividends provided you document it properly

Sorry, being caught out by the HMRC has nothing to do with how poorly or well you document things - in the HMRC eyes you could have the best documentation in the world, but could still be inside IR35 or other rule because the structure of your business arrangements are not a true business, but just a vehicle to minimise tax.

For example if you have a single contract under a ltd co, with one client, year on year, all perfectly documented and no other business interests - if you are investigated by the HMRC you will still be subject IR35 rules and be asked to pay any outstanding back tax for up to 6 years previously.

 

[Kent Accountant]

Sorry Becker but what you are saying is not correct

If you are not within IR35, you can pay what you like

If you are within IR35, paying a larger salary doe not help. Except for 5% expenses, you have to pay all of it as salary

 

[primeaccounts]

Sorry, being caught out by the HMRC has nothing to do with how poorly or well you document things - in the HMRC eyes you could have the best documentation in the world, but could still be inside IR35 or other rule because the structure of your business arrangements are not a true business, but just a vehicle to minimise tax.

For example if you have a single contract under a ltd co, with one client, year on year, all perfectly documented and no other business interests - if you are investigated by the HMRC you will still be subject IR35 rules and be asked to pay any outstanding back tax for up to 6 years previously.

That is true but there was nothing in the original post to indicate they were a personal service company or anything else to indicate IR35 may be issue. Just wanted advice regarding correct procedures etc for dividends.

Basic tax planning for all limited companies is to take a modest salary then draw the remainder as a dividend subject to other income etc. Bringing IR35 into the equation here will only confuse other business owners etc who have quite rightly been given the advice to take the low salary and dividends by their accountant.

Obviously all answers to posts on here are only advice and i'm sure no one would want anyone to take action based purely on their advice which is given in many cases on the back of limited information.

 

[becker]

I think we're violently agreeing :|

That is true but there was nothing in the original post to indicate they were a personal service company or anything else to indicate IR35 may be issue.

Agreed, the same point I made in my original reply

However, recent changes in the rules have made this a risky strategy depending on the line of work you're in.

Basic tax planning for all limited companies is to take a modest salary then draw the remainder as a dividend subject to other income etc.

Agreed, but theres the rub – one mans modest is another mans pittance – there can be differing opinions within the HMRC about what is a ‘modest salary’ and a valid dividend – again depending on the line of work/industry you’re in.

Bringing IR35 into the equation here will only confuse other business owners etc who have quite rightly been given the advice to take the low salary and dividends by their accountant.

I used IR35 just as an example to illustrate a point.

Obviously all answers to posts on here are only advice and i'm sure no one would want anyone to take action based purely on their advice which is given in many cases on the back of limited information.

Agreed, the same point I made in my original reply

Also, best to seek the advice of a good accountant.

 

[PJD]

Hi all

Thanks for the many replies, I seem to have caused a healthy debate!

The company in question is a newly formed Healthcare and training company with two directors / equal shareholders who want to earn a wage of say £25k a year whilst saving as much tax as is legally allowed.

May have to read up on IR35 as I'm not familiar with it.

 

[Kent Accountant]

Agreed, but theres the rub – one mans modest is another mans pittance – there can be differing opinions within the HMRC about what is a ‘modest salary’ and a valid dividend.

I suspect that this is where we disagree. It doesn't depend upon the opinion of HMRC. It depends upon the correct interpretation of the legislation

 

[Kent Accountant]

Hi all

Thanks for the many replies, I seem to have caused a healthy debate!

The company in question is a newly formed Healthcare and training company with two directors / equal shareholders who want to earn a wage of say £25k a year whilst saving as much tax as is legally allowed.

May have to read up on IR35 as I'm not familiar with it.

Without knowing all the facts, a training company with more than one client is unlikely to be within IR35

 

[templarmc]

Hehehehe

LOL @ the accountants, they're nearly as obstreperous as the SEO peeps on here for having different opinions! Cripes, anyone would think someone raised the old Sage vs Quickbooks debate again...

Must admit, had been under the impression that the low salary/make up on dividends model was still the best way forward over the last few years and not aware of why that should have changed, but I'm all ears if anyone's got other views - other than follow the Ken Dodd school of tax planning...

BTW accountants, are taxi drivers your simplest clients? I know a few and their accounts always top out at £8000 max income, thats before they take their costs off. One wonders how they can afford to live :|