Should a director pay themselves more than the allowance?

[abpublish]

Hi all,

I am thinking of going Limited and in working out the benefits or otherwise I have two friends who already have limited companies whose accountants have very different views on directors' salaries.

One of the accountants recommends paying yourself a salary of no more than the personal tax free allowance and taking all other income in the form of dividends.

The other accountant has said that it is best to pay at least the minimum wage to reduce the risk of the salary being questioned by HMRC.

I don't think it makes a massive difference but I also think why pay more tax and NI when you don't have to?

I would be very interested to hear opinions on this.

 

[cws accounting]

As long as the Director doesn't have an employment contract which details his working hours then there is no requirement to pay minimum wage. This is the key point in deciding the best pay structure. If there is no employment contract then it is usually best to pay a small salary and then the rest as dividends. The small salary (currently £589 per month) protects your entitlement to state benefits, state pension etc, but means neither you nor the company will pay any PAYE or NI. The rest would be taken as dividend.

 

[MyAccountantOnline]

As long as the Director doesn't have an employment contract which details his working hours then there is no requirement to pay minimum wage. This is the key point in deciding the best pay structure. If there is no employment contract then it is usually best to pay a small salary and then the rest as dividends. The small salary (currently £589 per month) protects your entitlement to state benefits, state pension etc, but means neither you nor the company will pay any PAYE or NI. The rest would be taken as dividend.

That's my view too - I see no point in paying unnecessary tax.

Just to add you can pay £602 per month and pay just a few pounds in NI at the end of the tax year rather than £589 per month and no tax and NI (assuming you have no other income)

 

[David Griffiths]

If it is a one person company, then there is no reason not to pay at the basic level.

However, if there are several directors, particularly if unrelated (although family relationships can go wrong) then there is a fair case for saying that each should be paid national minimum wage.

Yes there is a cost in terms of NIC but it takes away the possibility of a claim from a disgruntled former director in future years.

I believe that if you have multi director companies then you need to flag this risk so that they can make their own decisions.

 

[DeanCo]

Assuming no other income, I would always go for salary the same as the earnings limit and the remainder in dividends, ensuring no tax or NI is payable but getting NI credits for pension and benefit purposes.

Paying anything above this amount just to suit whatever HMRC may think is a little naive.

 

[accountancyextra]

Ian,

I'd have to question whether the second accountant is working in your friends best interests or HMRC's?

So what if HMRC don't like it? It's a perfectly legal, common and acceptable way to pay a director (as long as all the other paperwork is in order!!) and any "strong" accountant would be more than capable of standing up to an enquiry on this point.

I'd also wonder what else he may be afraid of claiming that would save your friend tax?

 

[abpublish]

Well the replies appear to be unanimous! I shall be sure to pass this info on to my friend who appears to be getting poor advice from his accountant. Also clarifies one minor point with my difficult decision as to whether to go limited or not.

Many thanks for your replies all.

 

[elaine@cheapaccounting]

The other accountant has said that it is best to pay at least the minimum wage to reduce the risk of the salary being questioned by HMRC.

.

A myth held by some accountants with no basis in fact