Skint - pay rise or extra divis?

[Denny]

Here goes -

I'm completely strapped as I'm trying to stay under the 40% and keep the money in the company. However, it's come to the point where I'm going to have to get some extra out to cover me until April. My accountant says go for the divis as the rise will cost me more. However, my current wage doesn't really cover my monthly living costs. I pay myself around the 9600 quid a year net mark at the moment.

So: do I go with the extra divis, a rise, or a combo of both?

Well, if your current wage doesn't cover your living costs before, then it needn't now. However, do bear in mind that some accountants, maybe not your own, try and discourage unrealistic salary levels that don't reflect the market rate for your skills because the general principle of being in business is that dividend payouts are a nice 'extra' - a reward for running your business profitably. They aren't intended as a salary supplement because of the tax avoidance implications that goes with that by dodging NI contributions on income that the HMRC view as salary. These more cautious accountants warn that you do run a greater risk of being investigated by HMRC, particularly if your divis are being paid out regularly, usually monthly, making them to look like salary supplements. Others will dispute this, however.

But what constitutes a 'market' salary is anyone's guess and is the topic of hot debate with the current income shifting proposals being drafted at present. That's why other accountants poo poo this cautious approach and cut to the chase and advise what is strictly legal not what HMRC expect and what other accountants recommend as advisable. After all cases have to be won first before HMRC can get their grubby mits on your hard earned cash.

All told, there doesn't seem to be a generalist unanimous view of what is safe and what isn't - so it's anyone's guess what you should do. So I would take your own accountants advice - after all, that's what you are paying them for.

[Denny]

How about getting your company to give you a loan to tide you over until April. Then a big divi after that, and pay back the loan.

The loan can be interest free but must be less than £5000 and needs to be paid back in full within 9 months, according to my accountant, unless you are closing the business. In which case, the loan must be paid back before the business is wound up. Important, if you are thinking of taking advantage of the April 2008 ruling.