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Is reducing Director salary tax avoidance?

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    Is reducing Director salary tax avoidance?

    So, while investigating what salary to pay myself this year, my accountant has recommended taking around £7.6k as opposed to the £10k which takes advantage of the NI changes recently. Apparently it's because the tax saving is relatively small and if the NI benefit is removed in future, reducing my salary back to the most efficient level again may be seen as tax avoidance.

    I asked for further details on the precise regulations etc. that this was based on and received the following:

    "This is our professional opinion on the matter.This is from our accountancy director who has worked for HMRC for 20 years.His thinking behind this is that the main reason, if not the only reason, to reduce the director salary would be to avoid tax, therefor this could be lead HMRC to believe it is tax avoidance.
    It would not be a transaction with a director that is held at arms length. If you were a normal employee and not a director it would not be believable that you are expected to do the same work, but for a reduced remuneration.
    We are not saying you cannot lower your salary, and doubtless many people will, but we simply do not recommend it."

    Any thoughts, particularly from those with a professional interest in this area?

    #2
    When I went to see the accountant I'm moving to I asked about this - going to £10K salary and applying for the NI relief and was also told that it really didn't make much of a difference either way with regards to take home.

    I'll be moving to £10K for other reasons, and if the changes are reversed and I end up paying a little bit more to HMRC then I'll live with it.

    Comment


      #3
      Another reason for doing this, is corporation tax- Payable against your profit.
      Any PAYE salary's taken from the business, is an expense to the business.
      Therefore yes reducing your profit, but money you receive from the business tax free, and without paying corporation tax on it.

      Comment


        #4
        Originally posted by Smartie View Post
        If you were a normal employee and not a director it would not be believable that you are expected to do the same work, but for a reduced remuneration.
        That assumes that companies never ask employees to take a pay cut, which isn't really a valid assumption.

        Some years back (1999 or 2000 IIRC), Larry Ellison reduced his salary to $1 a year as CEO of Oracle without reducing the amount of work he did.
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          #5
          I don't think it's tax avoidance at all, there can be many reasons to increase or decrease a salary.

          The most tax efficient salary is generally going to be £10,000 as it's covered by your personal allowance, gets CT relief, the employee's NI is minimal and you can probably claim the Employer's Allowance to cover the Employer's NI.

          There is an argument to be had about National Minimum Wage, but that's been done in other threads!
          ContractorUK Best Forum Adviser 2013

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            #6
            Originally posted by Ticktock View Post
            When I went to see the accountant I'm moving to I asked about this - going to £10K salary and applying for the NI relief and was also told that it really didn't make much of a difference either way with regards to take home.

            I'll be moving to £10K for other reasons, and if the changes are reversed and I end up paying a little bit more to HMRC then I'll live with it.
            I'm doing the same and I have no problems with the situation if things change - I'll live with it too.

            To the amazement of many, screwing as much money out of the company as I can is not the reason I'm in business...
            "I can put any old tat in my sig, put quotes around it and attribute to someone of whom I've heard, to make it sound true."
            - Voltaire/Benjamin Franklin/Anne Frank...

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              #7
              You could argue being a director of a one man IT LTD and paying minimum wage is tax avoidance but lets not go there hey
              'CUK forum personality of 2011 - Winner - Yes really!!!!

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                #8
                Sounds like being overly cautious for the sake of it. Yes, its a means of avoiding tax in the strictest sense if the only reason you're doing it is to reduce your overall tax contribution but a) how would HMRC know why you've changed your salary? and b) there's not a whole lot that HMRC can do about it anyway.

                Businesses can pay their employees whatever they like (subject to NMW in most cases although probably not in our case) and HMRC are more likely to be interested if you're paying somebody a salary that's excessive or for not actually doing anything (where they could disallow it for CT purposes as the salary wouldn't pass the wholly and exclusively rule).

                If you're the sole shareholder of YourCo, you should certainly consider taking the full £10k salary as in most cases it is the most tax efficient salary (if you're not the only sole shareholder, you may want to stick to a salary at or near the NI threshold).
                Last edited by TheCyclingProgrammer; 27 March 2014, 15:40.

                Comment


                  #9
                  I'm paying more than the minimum but that's nobody's business but my own.
                  "I can put any old tat in my sig, put quotes around it and attribute to someone of whom I've heard, to make it sound true."
                  - Voltaire/Benjamin Franklin/Anne Frank...

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                    #10
                    I wonder if HMRC will see pushing it up to £10k and then applying the employer's allowance as potentially pushing the limits.

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