Paying salary and dividends question

**Cowboy Bob** · 22 February 2007, 21:05

Originally posted by Mr Pancamo

I earn £300/day so it's not like I dont' have the funds.

No you don't. Your company does. You earn £10k a year. Always remember the distinction.

Of course your company can distribute it's profits to it's shareholders in any way it sees fit, and as regularly or irregularly as it requires. Just remember to record the reasons for the dividend payments in your board meeting's minutes...

**Diestl** · 22 February 2007, 22:03

Originally posted by Mr Pancamo

Hi

Apologies for the possibly silly question, but I am new to contracting and haven't seen this answered anywhere.

Loads of people have advised me to pay myself around the £10,000 mark to avoid the taxman's radar. £10k a year is about £600 a month or so.

Taking into account my rent, bills, entertainment and wanting to beef up my personal bank balance, I'd like to place about £3000 into my account each month. I earn £300/day so it's not like I dont' have the funds.

Is the answer to pay myself dividends every month? Or can I do this only once a year? And why is it better to pay myself dividends rather than actual salary?

One final question - in a year or two, I'd like to put down a downpayment on a house. Is the best option to pay myself £600/month (£10k a year), £2400 dividends (to make up the £3000 month into my personal account), and then keep the rest in my business account? Will I have to pay extra tax though when I draw this out?

Hope someone can help!

Cheers

Best to get an accountant, Nixon Williams will work it all out for you at 70 quid a month. I think they can get up to 80% net.

**Diestl** · 22 February 2007, 22:05

Originally posted by Denny

This is the classic 'tax evasion' query that contractors fall into the trap of. It's not even 'avoidance' because you're whole attitude is about saving tax not running your business efficiently.

At the very least you should pay yourself a living salary to cover all your personal outgoings. If your personal expenditure far exceeds a minimum salary then what conclusion will Gordo's henchmen come to if an IR investigation ensues. Unless you have other private means to supplement this miniscule salary then pay yourself more.

Dividends should only be paid out to shareholders as a reward for investing capital to grow the company. Therefore, if you can't satisfy yourself that you are doing this, then you shouldn't be drawing them. That's why you should never draw them monthly or set up regular patterns that look odd in the books as this simply looks like a salary supplement (which is clearly is, in your case).

You should only consider drawing divis quarterly, and preferably half annually or annually, if at all, and for the right reasons. If you can't do this, then just up your salary so that you can live off your income properly.

If your outside IR35 you can pay yourself any way you wish, its all legal.

**Mr Pancamo** · 22 February 2007, 22:17

Thanks guys..the reason I ask is that most accountants (Nixon Williams etc) *do* advise to pay yourself £10k a year and bump up the rest with dividends.

I am torn between paying myself £10k a year and 'avoiding' higher tax, and paying myself a decent salary and then paying more in tax!

**VectraMan** · 22 February 2007, 22:22

The optimum amount of divs is about £24K IIRC (with a £10K salary). That keeps you just out of the upper rate tax band and means you personally won't be paying any tax at all on that £24K (however the company will have had to pay 19% CT). So you should pay at least that much by the end of March otherwise you're losing out.

**VectraMan** · 22 February 2007, 22:34

Originally posted by Mr Pancamo

I am torn between paying myself £10k a year and 'avoiding' higher tax, and paying myself a decent salary and then paying more in tax!

Ideally you'd pay £5K per year to maximize your income.

I don't think anybody knows for sure that a lower salary is more likely to trigger an investigation or not. For all we know they pick people out of a hat regardless of what they do. And if you are investigated and you win, then all you're doing by paying a larger salary is wasting money. After all, you're only following the law of the land.

On the other hand, if you lose, it won't matter how you paid yourself, you'll be stung for the full income tax and NI. So all we're doing is speculating that wasting a bit of money on tax means we're more likely to get away with not having to pay more.

**Nixon Williams** · 23 February 2007, 10:11

My view is that you should pay a salary in line with the minimum wage, which is around £10K per annum.

The rest of the income can be taken as dividends, provided these are paid from profits they can be paid monthly. We calculate the profits each month for our clients, so a monthly payment is not a problem.

Alan

**XLMonkey** · 23 February 2007, 10:45

Originally posted by VectraMan

I don't think anybody knows for sure that a lower salary is more likely to trigger an investigation or not. For all we know they pick people out of a hat regardless of what they do.

I do know, and (although the exact policy varies), they rarely do it based on salary alone. The things that are most likely to trigger an investigation are:
- a big change in the amount of personal tax that you have paid (so, someone goes from paying 25k/year in PAYE tax to paying 1k/year).
- failure to administer your company payroll properly (i.e. forgetting to send in the yellow PAYE slips on time all of the time).

There are occasional trawls that they do when they pick at random, but these are infrequent (and becoming less so, given how poor the success rate is). Issues like 5k vs. minimum wage vs. market salary come into the picture AFTER the investigation has started, rather than CAUSING the investigation to start in the first place.

For peace of mind, you need to be able to justify to yourself what your salary policy is, rather than worrying about what'll happen in the event of an investigation. (for me, I'm very comfortable justifying my minimum wage policy, and will do so if investigated. But everyone has to justify it based on their own circumstances)

**VectraMan** · 23 February 2007, 12:37

Originally posted by XLMonkey

- failure to administer your company payroll properly (i.e. forgetting to send in the yellow PAYE slips on time all of the time).

That's a bit of a worry as I had one reminder, and now they've sent me another one for a payment that I made on time. So HMRC cock up your PAYE account, and even though you've done everything right you get investigated. And it's impossible to phone them.

Paying salary and dividends question