Dividends and salary

[northernladuk]

Hang on!!! You are the guy who's wife rang HMRC and dobbed you in it aren't you!!

No wonder your accountant is tulipting bricks. He is stuck between your tax avoiding and HMRC knowing all about it

http://forums.contractoruk.com/accou...ml#post1625471

[Waldorf]

I guess your accountant is not a contractor specialist? I have found that the typical high street accountants have no idea how contractors operate.

[jamesbrown]

The whole hog is actually ~£7.5K, but I know you're aware of that.

It would be interesting to hear from the likes of a big contractor accountancy firm (such as SJD) and actual numbers of IR35 investigations based on basic salary taken. Are there more investigations for the £7.5K vs £11K salary?

Well, we aren't going to hear about their risk profiling for obvious reasons, but there's no evidence that they do and it seems unlikely that they would because it's going to be a poor predictor of risk. Yes, there would be a higher liability on a low salary/high dividend combination if found inside. In practice, many of the well-known accountancy firms advise the secondary NI threshold. Some advise national minimum wage. My personal opinion is that NMW is no more a "commercial salary" than the secondary NI threshold (and it seems doubtful that they'd profile on the secondary NI threshold specifically), so it's somewhat moot unless you want to pay a "commercial salary", and then it's definitely moot.

[jamesbrown]

I guess your accountant is not a contractor specialist? I have found that the typical high street accountants have no idea how contractors operate.

Yes, I think you're probably right.

[mudskipper]

My accountant is a cautious fellow which is just the way I like him, most of the time, mHowever I do sometimes feel as though he suspects me of wearing a wire or having my office bugged, because I cannot get a straight answer from him on a fairly fundamental question and believe me, I've tried.

Basically, the question that turns him green is this - why do I have to go out of my way to make dividends appear as unlike a salary as possible? my ltd company is paying me a low salary (£20,000) plus a few quid for the wife, and I am topping that up with dividends of around £20,000 every few months depending on how profits are going. Surely the revenue doesn't expect me to live entirely on the low salary and spend the dividends exclusively on caviar and champagne?
To put this in context, I recently had to query why the Revenue had issued me with a 0TX tax code and discovered it was because I earned more than £100k last year so they projected I'd presumably be earning that again this year and wiped my personal allowance accordingly. However last year I was an employee of a large corporate. This year I am employed by my small ltd, hence the 80k drop in annual salary. My accountant is hyperventilating at the thought of the taxman knowing I've taken such a large drop. But I say again, why does it matter? If I'm allowed to take dividends from profit, why does it matter that I use it for living expenses in the same way I previously used my salary?

£20K paye, + £20k "every few months" is well into the higher tax bracket. If you've come from a permie PAYE job in this tax year, then probably all of it will be higher rate. I avoid that, so not completely clued up on this area, but my understanding is that you're expected to take the same income next year as this year, and they'll take some of the tax in advance if you go into the higher bracket - maybe one of the financial bods could confirm how this works. Perhaps could explain the tax code?

Do you understand that all your income is subject to tax - whether taken as salary or divvies. The difference is that divvies have already been taxed up to the lower rate. If you're taking £100K, you'll be taxed on £100K. The saving between salary and divvies is on NI (assuming you're outside IR35) - that's why a lower salary is recommended.

[Contreras]

Well, we aren't going to hear about their risk profiling for obvious reasons, but there's no evidence that they do and it seems unlikely that they would because it's going to be a poor predictor of risk. Yes, there would be a higher liability on a low salary/high dividend combination if found inside. In practice, many of the well-known accountancy firms advise the secondary NI threshold. Some advise national minimum wage. My personal opinion is that NMW is no more a "commercial salary" than the secondary NI threshold (and it seems doubtful that they'd profile on the secondary NI threshold specifically), so it's somewhat moot unless you want to pay a "commercial salary", and then it's definitely moot.

Paying NMW to avoid being risk profiled by HMRC has to be right up there in the top 10 of IR35 myths. HMRC won't publish criteria for their risk profiling (assuming they even have any formal criteria). The IR35 insurance companies surely have a very good idea if there is a profile what the criteria are, but it would suit them as well not to mention that. Now only if a certain not-for-profit organisation would step up and start collating this type of information for the benefit of members, that would be quite a worthwhile exercise IMHO.

Personally I would speculate that if anything it is the total dividends that would initially flag somebody. In other words unless £20k salary is going to put a big dent in the dividends then why bother?

Btw, you can pay up to the Primary Threshold without incurring any additional tax (overall), so do that if you believe it makes you less of a target.

As for the OP, Arab, I would concur with the other responses that maybe you should be looking for a new accountant as it doesn't sound like you are getting a good service there. I disagree that only the big online contractor accountants can provide an effective service, there are plenty of smaller local outfits that well understand the needs of contractors so shop around and find a service that you will be happy with.

[Arab]

Thanks and quick answer to some of your Qs

The Mrs does do a fair bit of work, doesn't have shares so not an income shifter just pay her a small salary. She keeps time sheets etc
No chance of being IR35 contract, accountant is aware of this so should not be concerned.
Not going into upper tax bracket as being careful to stay below it having been caught when an employee on PAYE.
Initially took dividends quite often, inc monthly, but have settled into a pattern of around 2-3 quite large ones per year. Taking an income of salary and dividends combined of around £70,000 and leaving a comfortable amount in the account at year end to put to pension pot.
A lot of consultants I know become so paranoid about paying as little tax as possible they stop taking much money out and don't live as well as they could and should. I am happy to pay a bit of tax in order to have a life - can't take it with me (unless I'm going to Vagas)

[northernladuk]

But are you going to take the advice and speak to a different accountant that knows what he is doing?

[Arab]

As a matter of interest why would monthly dividends be an issue?

Just out of curiosity, does your accountant specialize in contractors? As written, the recommendation of a 20k salary coupled with concern about dividends being "spent as salary" is pretty weird. Perhaps if he was talking about issuing dividends monthly as a salary-type payment, but that's not what was written....

Just a thought but we started paying monthly dividends as couldn't afford to do otherwise. Is that maybe what the accountant was concerned about in the event of an investigation? Why does it matter when the divs are taken as long as we can demonstrate that there was distributable profit in the account at the time (ie set aside in separate account for VAT and corp tax liabilities)?

Anyone? Think this might me the crux of the matter

[Arab]

Yes

But are you going to take the advice and speak to a different accountant that knows what he is doing?

Yep sorry, will ask around at work to see who others use locally. I'd prefer a local firm for some face to face time. Thanks for that steer