Dividends and salary

[northernladuk]

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

I would argue from personal experience you don't. I would rather a mail an accountant with 11000 contractors on the book than go talk face to face to someone who doesn't know what they are doing. I have been with SJD for 6 years and never met a single person but they reply to mails on the same day and I very rarely call and can't speak to my accountant. The thing is they are good enough to not really need me to mail or call them. I remember from previous posts that Nixon Williams, InTouch etc have exactly the same feedback. Knowledge > locality in my book.

Paying tax needlessly on £12.5k is a good reason not to go with a local setup.

Each to his own at the end of the day but after this mess I would re-look at my options.

[Wanderer]

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)

Based on a company turnover of about £100k or £440/day, I'd estimate that you are paying about £10,000/year in tax that you could avoid. Specifically:

1. Don't take more than £7488 (£624/month) salary.
2. If your wife has no other income then you should be paying her £7488 and income splitting with her by issuing her with shares.
3. Salary and dividends of around £70k combined will make you a higher rate tax payer so you have a nasty shock on the way when you do your self assessment.

Check out this calculator to verify what I've written above.

However, if you are happy to make a starbucks style "voluntary" donation to the exchequer then good on you! Each to their own.

[BA to the Stars]

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

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.

[mudskipper]

The Mrs doesn't have shares

Not going into upper tax bracket

Taking an income of salary and dividends combined of around £70,000

That doesn't add up. You must be paying tax at the higher rate.

[LisaContractorUmbrella]

That doesn't add up. You must be paying tax at the higher rate.

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

[Andrew@Wisteria]

Reponse to your question

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?

>>>>This would be because if you are working as a contractor earning a salary you may be considered to be caught by the IR35 rules (thus requiring you to pay more tax/NI). Monthly dividends would make it look more like salary and problematic with an investigation.

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?

>>>Re: salary to avoid any additional tax or NI charges you want to be paying £620 a month. Dividends up to the high rate band c. £42k would also ensure you incur no further high rate tax charges. You wife's employment position is relevant for tax planning purposes also. Ultimately it is whether you could live on these minimum salary & dividends that you would draw. If not then you will need to incur further tax charges.

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?[/QUOTE]

>>>>>personally I don't think this matters. I would be surprised if HMRC would care.

>>>>re: choice of accountant - given you will be paying c. £1-1.5k for the full service having a face to the name is very important. You want to be dealing with a single contact who knows you and your business inside out, not just a trainee on the end of the phone. An expert with multiple years of experience. If you want a cheaper service then an "online" accountant could work.

[northernladuk]

1. Don't take more than £7488 (£624/month) salary.
2. If your wife has no other income then you should be paying her £7488 and income splitting with her by issuing her with shares.
3. Salary and dividends of around £70k combined will make you a higher rate tax payer so you have a nasty shock on the way when you do your self assessment.

Number 2.. Wrong! You should be paying her for work done to the business. If she isn't doing £7488 worth of work she shouldn't be paid it. You don't just give her it for nothing.

[northernladuk]

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 don't agree with this. You can issue dividends anytime you want to as long as the other voting shareholders agree. The fact you do it monthly which just happens to be generally the same as permies has got absolutely nothing to do with it. You are comparing apples and pears. A salary and a dividend are completely different things. They cannot be mixed up with each other just because of the payment routine. My rent from my BTL comes in monthly, does that mean my dividend could be construed to be rental income? No it doesn't.

To be fair I pull all my dividends out as fast as possible and stick them somewhere that earns something and then draw down on that. Leaving profit in the company at 0.5% just because you want to pay a monthly divi is a bit of a waste IMO. Still don't believe the monthly divid = salary is true.

[Wanderer]

That doesn't add up. You must be paying tax at the higher rate.

Not yet he's not. He will when it comes to self assessment time though!

Number 2.. Wrong! You should be paying her for work done to the business. If she isn't doing £7488 worth of work she shouldn't be paid it. You don't just give her it for nothing.

Yeah, of course.

[BA to the Stars]

Whilst there is nothing to stop monthly dividends, indeed they can be at any frequency, I was looking at it more from the perspective of an investigation whereby the taxman would use the starting point of that is monthly income and I will consider to be salary regardless of whether it is a dividend or not.

If a portfolio of shares is held in many companies then divdend payments will be seen frequently and the taxman will not have an issue.

It may be me being paranoid, but it seems as though we are seen as easy targets and anything that gives the taxman a chink of light he will seize upon, whether it is legal or not. Perhaps I should just be like Spongebob in that other thread