Salary treated as Dividends

[SarahC]

Hi there,

My accountant has treated my salary as dividends on my last personal tax return and she said that as long as both personal and company tax return match, there is no problem.
I wrote "Salary" as reference on every bank transfer that I made.
Now, my bank statements show a monthly withdrawal called "Salary" but there are....dividends

What do you guys think?
Are we allowed to do that?
Doesn't seem to be right to me....

Many thanks for your response

[ASB]

Hi there,

My accountant has treated my salary as dividends on my last personal tax return and she said that as long as both personal and company tax return match, there is no problem.
I wrote "Salary" as reference on every bank transfer that I made.
Now, my bank statements show a monthly withdrawal called "Salary" but there are....dividends

What do you guys think?
Are we allowed to do that?
Doesn't seem to be right to me....

Many thanks for your response

I could write 'claimable expenses' on every bank transfer. Doesn't mean it is.

In order to be a salary payment you would have had to have done the paye etc. It doesn't look like you have done this (but you may).

What it appears has happened is that you have simply been withdrawing random amounts of money from the company. Strictly in the absence of anything else these would be a loan. Your accountant appears to have decided you have paid a net dividend of that amount. There is no real problem with this but there are a couple of other points to consider:-

a/ Ensure you have taxable income of at least your personal allowances. This amount of salary costs zero in tax, but reduce the profit by this amount (thus meaning it doesn't get charged to CT saving you the CT) Of course this income doesn't have to come from your company, you may have it from elsewhere; e.g. saving income, rental property, other earned income etc
b/ Ensure the dividend you declare is at least equivalent to what you have drawn from the company less any actual net salary
c/ If you have the profit declare dividend such that you use up your lower rate tax allowance. You don't have to pay this, you can leave it in the company and draw it in the future with no further tax to pay. A search on here should yield the amount fairly simply, it was last posted up a couple of days ago.
d/ If possible try and avoid declaring dividends which take you into the 40% band since you will have to pay further personal tax on them.

Remember tax is cumulative across all forms and sources of income, so keep this in mind in any planning.

[Greg@CapitalCity]

Not great but...

Not ideal for you, but as ASB says its not the end of the world, and these things happen. The most important thing is the substance of the transaction. If you paid it as dividends, meaning them to be dividends, and your business records correlate with this, then the description on your bank statement becomes less relevant.

[LisaContractorUmbrella]

I could write 'claimable expenses' on every bank transfer. Doesn't mean it is.

In order to be a salary payment you would have had to have done the paye etc. It doesn't look like you have done this (but you may).

What it appears has happened is that you have simply been withdrawing random amounts of money from the company. Strictly in the absence of anything else these would be a loan. Your accountant appears to have decided you have paid a net dividend of that amount. There is no real problem with this but there are a couple of other points to consider:-

a/ Ensure you have taxable income of at least your personal allowances. This amount of salary costs zero in tax, but reduce the profit by this amount (thus meaning it doesn't get charged to CT saving you the CT) Of course this income doesn't have to come from your company, you may have it from elsewhere; e.g. saving income, rental property, other earned income etc
b/ Ensure the dividend you declare is at least equivalent to what you have drawn from the company less any actual net salary
c/ If you have the profit declare dividend such that you use up your lower rate tax allowance. You don't have to pay this, you can leave it in the company and draw it in the future with no further tax to pay. A search on here should yield the amount fairly simply, it was last posted up a couple of days ago.
d/ If possible try and avoid declaring dividends which take you into the 40% band since you will have to pay further personal tax on them.

Remember tax is cumulative across all forms and sources of income, so keep this in mind in any planning.

e/ Ensure that you are working outside of IR35 as otherwise you are not entitled to draw dividends and your tax position will be significantly affected

[ASB]

e/ Ensure that you are working outside of IR35 as otherwise you are not entitled to draw dividends and your tax position will be significantly affected

Oops, forgot to mention that.

Strictly of course there is nothing whatsoever to stop you paying a small salary and high dividends in an IR35 caught scenario - though it would not be in any way sensible due to the taxation/ni consequence of the deemed payment.

[SarahC]

Well, we haven't done the PAYE or anything...so it should be fine.
I feel much better now
Many thanks for your help guys!

[ASB]

Well, we haven't done the PAYE or anything...so it should be fine.
I feel much better now
Many thanks for your help guys!

To protect yourself in any later enquiry that might happen ensure the dividends are properly minuted and the dividend vouchers are done. These might help:-

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