Switching from dividends to PAYE salary

[Wantinglegaladvice]

Currently taking dividends of around £60,000 plus a basic salary in addition for NI contributions.

This financial year has been pretty dismal with turnover dropping (due to major client pulling away) significantly along with profit.

Current upcoming liabilities are a £21000 Corporation Tax bill, though accounts are not yet finalised and a £30,000 BBL, of which £10,000 is repaid. Business is able to meet its day to day obligations as it stands.

Unfortunately, I can't afford to take a pay cut and I'm confident I can turn it around. What I wouldn't like to risk however is an overdrawn directors loan account as suddenly the company isn't anywhere near as profitable.

Awaiting on my accountant's advice but is it possible to switch to taking a set monthly amount as an employee salary via PAYE to avoid this? Would this be feasible?

 

[DWS]

Not entirely clear what you are asking, do you mean that your accounting year has ended and you are still finalising the accounts but moving forwards you wish to take a larger salary than dividends?
If so then there shouldn’t be a problem, if not can you give a bit more detail on what you mean.

 

[Wantinglegaladvice]

Not entirely clear what you are asking, do you mean that your accounting year has ended and you are still finalising the accounts but moving forwards you wish to take a larger salary than dividends?
If so then there shouldn’t be a problem, if not can you give a bit more detail on what you mean.

Essentially.

Year End was September. Since then the business recorded a profit of around £13k to date. In order to sustain myself and avoid an overdrawn directors account I looking to change it to a salary (say £8,000 per month) in order to keep my income at a similar level without owing the business.

 

[DWS]

Essentially.

Year End was September. Since then the business recorded a profit of around £13k to date. In order to sustain myself and avoid an overdrawn directors account I looking to change it to a salary (say £8,000 per month) in order to keep my income at a similar level without owing the business.

So I take it that in your September accounts the Company is showing a large amount of retained earnings?
If so then I can’t see a problem with taking a larger salary but you need to speak to your Accountant they are in the best place to advise.
You do realise that you will be having to pay out large monthly amounts in Income Tax and both EE and ER National Insurance.

 

[Wantinglegaladvice]

So I take it that in your September accounts the Company is showing a large amount of retained earnings?
If so then I can’t see a problem with taking a larger salary but you need to speak to your Accountant they are in the best place to advise.
You do realise that you will be having to pay out large monthly amounts in Income Tax and both EE and ER National Insurance.

Yeah, I realise there's tax implications but needs must. If the business doesn't ultimately recover I just wanted to ensure this wouldn't be considered underhand or preferential treatment. 30k retained.

 

[Newchodge]

Currently taking dividends of around £60,000 plus a basic salary in addition for NI contributions.

This financial year has been pretty dismal with turnover dropping (due to major client pulling away) significantly along with profit.

Current upcoming liabilities are a £21000 Corporation Tax bill, though accounts are not yet finalised and a £30,000 BBL, of which £10,000 is repaid. Business is able to meet its day to day obligations as it stands.

Unfortunately, I can't afford to take a pay cut and I'm confident I can turn it around. What I wouldn't like to risk however is an overdrawn directors loan account as suddenly the company isn't anywhere near as profitable.

Awaiting on my accountant's advice but is it possible to switch to taking a set monthly amount as an employee salary via PAYE to avoid this? Would this be feasible?

Yes and yes. But you need your accountant's professional advice as to whether, in all your circumstances it is the best thing to do. For example, there are 3 monthly salary days left in the HMRC financial year. You could take different amounts each month. If your company year ends sooner than end March, it may be better to take a single large PAYE payment, befre the company year ends.

 

[Wantinglegaladvice]

Yes and yes. But you need your accountant's professional advice as to whether, in all your circumstances it is the best thing to do. For example, there are 3 monthly salary days left in the HMRC financial year. You could take different amounts each month. If your company year ends sooner than end March, it may be better to take a single large PAYE payment, befre the company year ends.

Thanks, whilst I will be working to recover the business, if the company did end up insolvent would this look like preferential treatment? Misuse?

I'm trying to cover all bases. If a large salary has been taken say for example 7 months prior with CT due, etc (though in fairness the dividends have always been 60-70k) how would this be treated?

 

[Newchodge]

Thanks, whilst I will be working to recover the business, if the company did end up insolvent would this look like preferential treatment? Misuse?

I'm trying to cover all bases. If a large salary has been taken say for example 7 months prior with CT due, etc (though in fairness the dividends have always been 60-70k) how would this be treated?

If it was put though the bank as salary and reported via RTI at the time, no-one would turn a hair. The problems arise when people try to backdate unpaid salary payments.

 

[DWS]

Thanks, whilst I will be working to recover the business, if the company did end up insolvent would this look like preferential treatment? Misuse?

I'm trying to cover all bases. If a large salary has been taken say for example 7 months prior with CT due, etc (though in fairness the dividends have always been 60-70k) how would this be treated?

I thought that you was going to pay the salary out of retained earnings now I get the impression you are also thinking of using the money owed to HMRC which may mean the Company is insolvent and preferential treatment might come into play.
I am sure the IP’s on here would be able to give better advice but I think you definitely need to sit down with your Accountant.

 

[Wantinglegaladvice]

I thought that you was going to pay the salary out of retained earnings now I get the impression you are also thinking of using the money owed to HMRC which may mean the Company is insolvent and preferential treatment might come into play.
I am sure the IP’s on here would be able to give better advice but I think you definitely need to sit down with your Accountant.

At what point is money "owed". At the time of finalising of the account. At the time of when you calculate a rough idea of CT liability? Where's the line?

As it stands the company can cover its day to day liabilities. What it cannot do is if its not turned around within the next 7 months whilst I draw a salary via PAYE (the payment for the work on turning it around and to give me enough to live on) is settle its upcoming tax or continue as a viable business.

 

[DWS]

If your end of year is September then that is when the C/Tax will be owed as that is what the accounts will show.

 

[Wantinglegaladvice]

If your end of year is September then that is when the C/Tax will be owed as that is what the accounts will show.

Despite it not being due for a further 9 months?

 

[Wantinglegaladvice]

• Employees
  Employees are given priority because they put time and effort into the company. They are entitled to be paid unpaid wages, pension scheme contributions, and holiday pay, up to a maximum of £800.
  
  • HM Revenue and Customs (HMRC)
    HMRC is a preferential creditor for certain tax debts, including VAT, PAYE, employee National Insurance Contributions, student loan deductions, and Construction Industry Scheme deductions.
    
    
    So essentially Wages > CT ?
    
    

 

[DWS]

Despite it not being due for a further 9 months?

Well yes, you still owe it, you are just given 9 months to pay it.
When you prepare accounts they are up to 30th September and they will show the amount you owe in C/Tax at that date.

 

[Wantinglegaladvice]

The aim here isn't to shaft creditors. It's that profits have dropped considerably, I need to sustain a level of salary to turn the business around whilst not ending up liable for a DLA if it fails to turn around.

 

[DWS]

• Employees
  Employees are given priority because they put time and effort into the company. They are entitled to be paid unpaid wages, pension scheme contributions, and holiday pay, up to a maximum of £800.
  • HM Revenue and Customs (HMRC)
    HMRC is a preferential creditor for certain tax debts, including VAT, PAYE, employee National Insurance Contributions, student loan deductions, and Construction Industry Scheme deductions.
    
    
    So essentially Wages > CT ?
    

Yes you are an Employee but you are also a Director who should be putting the best interests of the Company first.
If you had been drawing a salary of £8k for a while then no problems in my opinion but it is only now even though you admit the Company is in financial difficulty that you want to raise your salary.

 

[Wantinglegaladvice]

Yes you are an Employee but you are also a Director who should be putting the best interests of the Company first.
If you had been drawing a salary of £8k for a while then no problems in my opinion but it is only now even though you admit the Company is in financial difficulty that you want to raise your salary.

Not even raise

Stay the same (always took most profits and about 70-80k a year, 30k in reserve) but paid via PAYE not dividends.

 

[Newchodge]

Not even raise

Stay the same (always took most profits, 30k in reserve) but paid via PAYE not dividends.

Sorry, that doesn' work. You are proposing to increase your salary very substantially. The fact you previously took a similar, if smaller, amount in dividends is irrelevant.

 

[Wantinglegaladvice]

Sorry, that doesn' work. You are proposing to increase your salary very substantially. The fact you previously took a similar, if smaller, amount in dividends is irrelevant.

I see your point now. I was thinking in terms of my overall pay regardless of source. It's only being replaced by PAYE as it doesn't have the required profits to declare that level of dividend.

So ultimately would this have a negative effect on my personal liability should there be insolvency?

 

[Newchodge]

I see your point now. I was thinking in terms of my overall pay regardless of source. It's only being replaced by PAYE as it doesn't have the required profits to declare that level of dividend.

So ultimately would this have a negative effect on my personal liability should there be insolvency?

Hang on let me look for my crystal ball.

Speak to your accountant.

 

[UKSBD]

Your post gives the impression that you think the company is going to fail soon, know that if you take any more money out as a dividend that it could come back and bite you, so are looking for a way to extract as much money out as possible before the corporation tax is due.

Suddenly going from a very low wage to £8k a month would probably get an IP thinking the same thing (if it ever gets to one being appointed).

 

[Ziggy2024]

I think you need to face reality here. The company can't sustain the level of drawings you require, regardless of how you take it.

You say the company can turn around but you need to take a huge chunk out of its profits each month. This will create a circular situation where the company still can't declare dividends (because the salary has created a loss) so you have to continue with salary, perpetuating the cycle.

If the company can't meet it's liabilities (which includes the tax) then it is insolvent and you need to face that. To trade out of it, you need to take less, if that isn't feasible then you need to look at insolvency.

 

[ChrisCallaghan]

Hi all,

My thoughts from an insolvency viewpoint:

@Wantinglegaladvice I think it is a positive that you are considering your responsibilities as a director by addressing this now. Much better than carrying on, having to liquidate in a year, and then finding yourself having to deal with a giant overdrawn director's loan account.

On the whole it's unlikely that a liquidator would take too much of an issue with the switch from dividends to PAYE for the same amount, so long as the total cost to the company is about the same - so factoring in the PAYE & NI cost, your take home could be reduced. The only serious consideration would be whether your PAYE salary amount is fair remuneration for your role and activities within the company, and that the resulting PAYE & NI (both employees and employers) are paid.

Personally, I advise prospective clients to do similar when they have concerns about their company being insolvent in the future, but still believe there is hope to turn things around.

If you go ahead with this switch, I would suggest recording your decision making process, which will aid you if the company enters into liquidation in the future. I also suggest you note in detail why you feel your company is not insolvent at this time, and why you believe continuing to trade does not constitute trading whilst insolvent/wrongful trading.

If you have concerns about the risks of trading whilst insolvent, myself (or any of the insolvency regulars here on UKBF) would be happy to offer you confidential advice.

I cannot comment on the tax implications - as others have commented, speak to your accountant.

(the above is my opinion only and does not constitute legal advice)

 

[DWS]

Hi all,

My thoughts from an insolvency viewpoint:

@Wantinglegaladvice I think it is a positive that you are considering your responsibilities as a director by addressing this now. Much better than carrying on, having to liquidate in a year, and then finding yourself having to deal with a giant overdrawn director's loan account.

On the whole it's unlikely that a liquidator would take too much of an issue with the switch from dividends to PAYE for the same amount, so long as the total cost to the company is about the same - so factoring in the PAYE & NI cost, your take home could be reduced. The only serious consideration would be whether your PAYE salary amount is fair remuneration for your role and activities within the company, and that the resulting PAYE & NI (both employees and employers) are paid.

Personally, I advise prospective clients to do similar when they have concerns about their company being insolvent in the future, but still believe there is hope to turn things around.

If you go ahead with this switch, I would suggest recording your decision making process, which will aid you if the company enters into liquidation in the future. I also suggest you note in detail why you feel your company is not insolvent at this time, and why you believe continuing to trade does not constitute trading whilst insolvent/wrongful trading.

If you have concerns about the risks of trading whilst insolvent, myself (or any of the insolvency regulars here on UKBF) would be happy to offer you confidential advice.

I cannot comment on the tax implications - as others have commented, speak to your accountant.

(the above is my opinion only and does not constitute legal advice)

Hi Chris
Not disagreeing with you at all hence why I suggested in a previous reply it would be good to get an IP’s view on this.
What I would be interested in is that by taking the OP’s route of changing from dividends to PAYE for approximately the same amounts this leaves it open for HMRC to challenge if the previous dividends taken should be treated as salary, just wondered your view on that?
Also bearing in mind that previously the Director was on a low salary and the Shareholder receives the dividends.

 

[ChrisCallaghan]

Hi Chris
Not disagreeing with you at all hence why I suggested in a previous reply it would be good to get an IP’s view on this.
What I would be interested in is that by taking the OP’s route of changing from dividends to PAYE for approximately the same amounts this leaves it open for HMRC to challenge if the previous dividends taken should be treated as salary, just wondered your view on that?
Also bearing in mind that previously the Director was on a low salary and the Shareholder receives the dividends.

I'll bow out on what HMRC's opinion of this will be, I can only comment (as I have) on what a liquidator's viewpoint would be.

OP would be best speaking with their accountant about any tax/HMRC implications.

 

[Lisa Thomas]

Hi all,

My thoughts from an insolvency viewpoint:

@Wantinglegaladvice I think it is a positive that you are considering your responsibilities as a director by addressing this now. Much better than carrying on, having to liquidate in a year, and then finding yourself having to deal with a giant overdrawn director's loan account.

On the whole it's unlikely that a liquidator would take too much of an issue with the switch from dividends to PAYE for the same amount, so long as the total cost to the company is about the same - so factoring in the PAYE & NI cost, your take home could be reduced. The only serious consideration would be whether your PAYE salary amount is fair remuneration for your role and activities within the company, and that the resulting PAYE & NI (both employees and employers) are paid.

Personally, I advise prospective clients to do similar when they have concerns about their company being insolvent in the future, but still believe there is hope to turn things around.

If you go ahead with this switch, I would suggest recording your decision making process, which will aid you if the company enters into liquidation in the future. I also suggest you note in detail why you feel your company is not insolvent at this time, and why you believe continuing to trade does not constitute trading whilst insolvent/wrongful trading.

If you have concerns about the risks of trading whilst insolvent, myself (or any of the insolvency regulars here on UKBF) would be happy to offer you confidential advice.

I cannot comment on the tax implications - as others have commented, speak to your accountant.

(the above is my opinion only and does not constitute legal advice)

Agree with Chris. Reminders me of an old case where Directors came to see us for advice and were told to stop drawing dividends due to company's insolvency. Instead, they just hiked up the salaries to a sum that was way over market level. Ultimately had to pay the funds back when the company was liquidated...

 

[ChrisCallaghan]

Agree with Chris. Reminders me of an old case where Directors came to see us for advice and were told to stop drawing dividends due to company's insolvency. Instead, they just hiked up the salaries to a sum that was way over market level. Ultimately had to pay the funds back when the company was liquidated...

I've had a couple of those over the years!

 

[UK Contractor Accountant]

If you believe in saving the company why don't you put yourself on the market rate salary for the job role and then prepare monthly management accounts with ctax provisions included to determine the maximum amount you can take as dividends each month.

If its just cash flow issues causing problems due to customers taking longer to pay then look at arranging some form of finance - overdraft, loan, invoice financing, capital on tap etc.

Personal finances - again look at reducing your monthly outgoings. Debt restructuring, payment holidays, remortgaging, renegotiation contracts, cancelling non essential luxuries etc.

 

[Newchodge]

If you believe in saving the company why don't you put yourself on the market rate salary for the job role and then prepare monthly management accounts with ctax provisions included to determine the maximum amount you can take as dividends each month.

If its just cash flow issues causing problems due to customers taking longer to pay then look at arranging some form of finance - overdraft, loan, invoice financing, capital on tap etc.

Personal finances - again look at reducing your monthly outgoings. Debt restructuring, payment holidays, remortgaging, renegotiation contracts, cancelling non essential luxuries etc.

I think this quote from the first post probably explains the issue.

Unfortunately, I can't afford to take a pay cut

OP Can you afford NOT to take a pay cut?

 

[UK Contractor Accountant]

Current upcoming liabilities are a £21000 Corporation Tax bill

Arrange payment plan with HMRC

If you cannot pay your tax bill on time

Contact HM Revenue and Customs if you cannot pay your tax bill - get more time to pay or pay in instalments.

www.gov.uk

 

[ChrisCallaghan]

Arrange payment plan with HMRC

If you cannot pay your tax bill on time

Contact HM Revenue and Customs if you cannot pay your tax bill - get more time to pay or pay in instalments.

www.gov.uk

Typically they will expect a payment plan that sees the total repaid in 12 months or less, though this is not a hard rule. It is very much dependant on OP's company's past with dealings with HMRC.