Dividends and salary

[Arab]

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?

[Greg@CapitalCity]

So your accountant is saying be careful how you SPEND your dividends? I am afraid I cannot think of any basis what s/he might say that. Spend your dividends on what you like. Spend your salary on what you like. Its your money.

[Arab]

Dividends and salary

Thanks and in answer to the previous poster...I think he's worried that my dividends look like they're being used for what my salary was previously used for. He doesn't want dividends to look like I'm treating them as a replacement for my salary.....

[northernladuk]

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.

It's probably a personality trait and that is why he is an accountant. <puts tin hat on>

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?

They can't be any more different. Run the two correctly and there is no need to do any more. I think the way you have worded this is the problem.

my ltd company is paying me a low salary (£20,000) plus a few quid for the wife,

Hang on, he advised you pay yourself £20k. Get a new accountant. Seriously.
The few quid for the wife is probably a sham and this is one of the reasons he is playing it super cautious.

and I am topping that up with dividends of around £20,000 every few months depending on how profits are going.

Are you not bothering trying to say under the tax cap? Did he not advise this? See comment re get a new accountant above.

Surely the revenue doesn't expect me to live entirely on the low salary and spend the dividends exclusively on caviar and champagne?

Why not. Everyone on this forum does. As long as you get the money what does it matter what is dividends and what is salary? If you cant manage your finances why not take a monthly dividend.

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?

It doesn't. There must be something else he is looking at. I would say, but am happy to be corrected, not advising HMRC of a change in circumstances straight away is a pretty dumb thing to do as you just have to clear the mess up later. Maybe he is thinking by telling them you will be raising a red flag to your contractor set up to which he is not very comfortable... or knowledgeable from what I have read so far.

Get a new accountant, a contractor one. Have a look at the sticky and pick one of those. By dropping your wage to 11k or so you will be saving money straight away. The accountant you have is costing you money.

[northernladuk]

Thanks and in answer to the previous poster...I think he's worried that my dividends look like they're being used for what my salary was previously used for. He doesn't want dividends to look like I'm treating them as a replacement for my salary.....

Which you are. It's how this particular loophole works. If he isn't comfortable with it you need to sack him and get someone like SJD who has over 11K contractors on their books and are more than happy with the situation. The accountant recommendation thread has some good guys on it.

[Greg@CapitalCity]

I think he's worried that my dividends look like they're being used for what my salary was previously used for. He doesn't want dividends to look like I'm treating them as a replacement for my salary.....

Has he said why? His approach sounds insane.

[jamesbrown]

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....

[northernladuk]

Has he said why? His approach sounds insane.

Reading between the lines I don't think this is what he is saying. It sounds to me that he is not comfortable with a contractor set up and sees the stay below tax threshold and divi rest out as a tax dodge. The fact he suggests a 20k salary would back this up. If he knew the system and was comfortable with it he would have gone the whole hog and said £11k salary like contractor accountants do. OP is paying tax on 8-9k because of the accountants inexperience in this area.

[stek]

This is the best Sockie what I have ever done!

Hope I remember it in the morning....

[kingcook]

Reading between the lines I don't think this is what he is saying. It sounds to me that he is not comfortable with a contractor set up and sees the stay below tax threshold and divi rest out as a tax dodge. The fact he suggests a 20k salary would back this up. If he knew the system and was comfortable with it he would have gone the whole hog and said £11k salary like contractor accountants do. OP is paying tax on 8-9k because of the accountants inexperience in this area.

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?