Dividends and salary

[Wanderer]

should you be subject to an investigation and there are monthly dividend payments as evideneced by your dividend vouchers and bank statements, then the taxman will use the starting point of these are disguised salary payments, now prove otherwise.

I'm with NLUK on this one. As far as I know, HMRC have never successfully challenged frequent or regular dividend payments. The caveat is that they must be paid out of company profits and they must have proper meeting minutes and dividend vouchers. This means that the director must have a properly up to date balance sheet showing the company's assets and liabilities when the dividend is declared. I know that some directors get their company affairs into a mess by not doing this and end up taking dividends ultra vires and that's going to be problematic so I have some sympathy for accountants trying to sort out a mess at the company year end and getting blamed because the director has messed it up. However, if the accountant does the book keeping and approves the dividend payment then it should keep the director on the straight and narrow.

I'm sure there have been contentious cases where board meetings were held at the ATM beside the kebab shop on Saturday night or the minutes/vouchers got "lost" but if there are profits to be taken and the paperwork is in order then there is nothing HMRC can do about the director declaring a dividend.

Stop worrying and get on with running your business and taking the rewards. I don't see why my company should hold profits that it could reasonably pay out to the shareholders and if that means paying weekly dividends then so be it.

[Craig at Nixon Williams]

You are the director of the company so the declaration of dividends is ultimately your decision and you can pay a dividend from the company as often as you want. Providing that there is sufficient profits to make a distribution and you can demonstrate this (with monthly profit and loss statements etc) then there is nothing to stop you from paying a dividend monthly.

[jamesbrown]

Monthly dividends should be avoided. Even though the tax man will only see the annualised figure from your company accounts as there is no need in them to show the frequency of distribution. However, should you be subject to an investigation and there are monthly dividend payments as evideneced by your dividend vouchers and bank statements, then the taxman will use the starting point of these are disguised salary payments, now prove otherwise. Don't forget, in the eyes of the taxman, you are guilty until you can prove you are innocent.

I wouldn't say this. But I would say that I could understand his position if that was it (rather than how you spend the dividend ).

[Jessica@WhiteFieldTax]

I'm with NLUK on this one. As far as I know, HMRC have never successfully challenged frequent or regular dividend payments.

Many people were concerned that HMRCs victory in PA Consulting was such a challenge, or would open the doors to one - however the circumstances were different, alphabet shares, and paid to staff rather than owner/directors. Its probably the case HMRC could use the same legislation to challange a typical low salary / high dividend arrangement, but there is no indication there is any appetite for them to do so.

In terms of risk profiling viz IR35, as the vast majority of small companies, even those miles away from IR35 risks, use this type of structure, targeting on salary levels wouldn't be efficient for HMRC; if they were, or become, serious about raising more IR35 enquiries, the obviously source would be a information request to agencies for a return of companies they have paid.

[simondolan]

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?

None. Ever. And that's having worked with about 30000 contractors over the years.

[simondolan]

Also worth pointing out that having your own Ltd Co, rather than working PAYE, means you get no sick pay, holiday pay, employee rights, no guaranteed income, no paid for training etc etc. The tax benefit you achieve by paying dividends in my mind is the upside to counter these disadvantages.

[Arab]

Yes you're probably right

I wouldn't say this. But I would say that I could understand his position if that was it (rather than how you spend the dividend ).

I'd say that's probably it, rather than my actual use of the cash. However at the end of the day if you're unlucky enough to be investigated, surely any look at your personal finances would yield the information that you are using all or part of your dividends to pay your way in life, therefore effectively using it like salary?

I continue to be confused as to what a dividend is supposed to be actually FOR. Whether its paid annually, monthly or daily, if you use it in the way you would otherwise use your salary, or in addition to your salary, then it's effectively your wages regardless of the vehicle for payment.

Guess this one could run and run...but thanks everyone for such helpful comments and lots to think about. Cheers

[northernladuk]

I'd say that's probably it, rather than my actual use of the cash. However at the end of the day if you're unlucky enough to be investigated, surely any look at your personal finances would yield the information that you are using all or part of your dividends to pay your way in life, therefore effectively using it like salary?

Nope, wholly and completely wrong and need to forget this. Dividends is another form of income. That is it, period. Forget any questions what you do with it. You draw low salary and take out high dividends as the tax is a lot lower on dividend income than salary. They are taxed differently which is scaring your accountant as he thinks it looks like you are avoiding tax, which you are but all above board and quite legally (providing your inside IR35 etc). Apart from being concerned about how the two are taxed there is no other issue. What you do with it when it hits your bank is no one's business but yours. You need to forget this one and move on. I am sure the accountant never suggested anything about how you spend it.

I continue to be confused as to what a dividend is supposed to be actually FOR. Whether its paid annually, monthly or daily, if you use it in the way you would otherwise use your salary, or in addition to your salary, then it's effectively your wages regardless of the vehicle for payment.

Guess this one could run and run...but thanks everyone for such helpful comments and lots to think about. Cheers

I can't really explain this one as it seems so basic. You have split your wage (low) and dividends (high) as dividends have less tax on it so you are reducing your overall tax burden... That's it. That is all they are for in our model. Once it hits your bank it is just classed as income, same as a salary, same as rental income and so on. The difference between salary and dividend is purely for taxation. Nothing to run and run. It's as simple as that.

Not sure how else to put it.

[LisaContractorUmbrella]

No offence but if you don't understand what a dividend is you should perhaps consider another accountant

[Arab]

Clarification

Agreed - if you have salary of £20k through PAYE then divs are £50k which means you will be paying higher rate tax

If I've understood correctly I will pay effective 25% on dividend income taken above the current limit of around £33k (don't have exact fig to hand). I tend to think of higher rate tax as 40% from my PAYE days so that may have caused confusion. Anyhow, 25% seems reasonable to me