Dividends Salary Investments - Stupid questions!

**cosmic** · 11 September 2019, 07:16

Originally posted by captainthunderpants555 View Post

Hello. I'm back into contracting so ready to start afresh after a few years. I have a ltd company, I'm 100% shareholder. I have three family members that will be on the payroll (10k salary each) along with me as well (12.5k salary) at so 4 of us in total. Let's imagine the annual income is 100k.

Main income is contract but we also provide other services.

Question is how do you guys normally split your salary and dividends? If i understand right then you pay corporation tax on company profit so that would be the 19% then if it's paid out as a dividend then the person receiving pays tax on that as income. So in my simple mind seems better to pay a higher salary as you don't pay corporation tax on that? As long as salary is below the 40% threshold and your company is in profit etc etc.

So is it better to do high salary and low dividends or the other way around?

Also the other thing is having loads of cash in the company is fine but oh man i want to see it working. Is there anything I can invest it in that doesn't incurr tax that is then easy to come back out of when it's time to pay VAT/corporation tax? always seems such a shame to leave it there idle waiting for the taxman.

Any suggestions and advice would be much appreciated! Thanks guys.

You need an accountant pronto! Also understand when money comes in it's hit by the tax man at 19% corp tax, Just because it's in your corp and doesn't go out doesn't mean you won't be hit by corp tax. Corp tax is applied at the end of year on everything that has come into the business as profit. Yes paying 4 people is considered as a loss. Also these 4 could be on a wage through company but that means you need to pay every month so must have funds. If they are shareholders than only div tax is paid at 7.5% rather than 20% income tax until they reach next tax bracket.

I would say pay min if you can. Other 3 must do some work in the business to be on pay. Then pay out div for the rest applied at 7.5%. Reduce corp tax by AIA and expenses.

**CryingSheep** · 11 September 2019, 08:38

Usually the best option is to pay a salary bellow the NI threshold, that for the current year is 8,632£ even though you will probably have a free income tax allowance of 11,500£.

Then you have a 2000£ tax free dividend and also if your income is 8,632£ the difference to 11,500£ can be paid as tax free dividend. (if you dont have any other sources of income, they all add up) Don't forget that as soon as you pass the NI threshold you will be hit by personal and company NI contributions with will put you worse off compared to 19% corporation tax and 7.5% dividend tax when paying dividend.

The most efficient way would be to pay all the 4 employees a yearly salary of 8,632£ and the rest in dividend divided by the 4. Don't forget that above 34,500£ individual dividend tax changes from 7.5% to 32.5%.

If you don't feel comfortable you should get an accountant, but this is the typical scenario they will probably put you on...

And as someone mentioned before, you must be asked why you're paying salary to the other 3, so they actually need to have some contribution to the company (income, paper work, other...)

**Lance** · 11 September 2019, 09:02

get an accountant. They cost peanuts compared to the cost of gettuing this wrong.

Three family members on the payroll? Are they actually working for you or not? If this is just about using their tax thresholds then you can't really do this (there are exceptions for a spouse - read that up on these pages).

I'm guessing this is just a tax avoidance scam. If so then why aren't you making the other 3 shareholders? Think of all that lovely dividend allowance (not that much but it adds up).

Taking the post at face value and assuming no chicanery......................
If they are actually employees you need to pay them minimum wage at least.
You don't have to pay directors minimum wage, but I'm guessing you're not planning on making them all directors.
Get an accountant unless you have the knowledge to run payroll and process RTI

**Scruff** · 11 September 2019, 09:11

Don't listen to what someone further up this thread has said. Take advice from a paid Professional Accountant, who has knowledge of how Contracting works, in the UK.

Having 4 Family employees, in a family run business, is not the same as having 4 Family employees in an IT / Engineering Contracting PSC.

**Lance** · 11 September 2019, 09:17

Originally posted by Scruff View Post

Don't listen to what someone further up this thread has said.

I'm not sure that's entirely fair.
Every poster has said the OP needs an accountant. With differing degrees of scepticism around the actual intention (which sound dodgy TBF).

**tomtomagain** · 11 September 2019, 12:25

This doesn't smell like an attempt to dodge tax at all!

Also the other thing is having loads of cash in the company is fine but oh man i want to see it working. Is there anything I can invest it in that doesn't incurr tax that is then easy to come back out of when it's time to pay VAT/corporation tax? always seems such a shame to leave it there idle waiting for the taxman.

No, there isn't.

**sal** · 11 September 2019, 12:27

Originally posted by CryingSheep View Post

Usually the best option is to pay a salary bellow the NI threshold, that for the current year is 8,632£ even though you will probably have a free income tax allowance of 11,500£.

Then you have a 2000£ tax free dividend and also if your income is 8,632£ the difference to 11,500£ can be paid as tax free dividend. (if you dont have any other sources of income, they all add up) Don't forget that as soon as you pass the NI threshold you will be hit by personal and company NI contributions with will put you worse off compared to 19% corporation tax and 7.5% dividend tax when paying dividend.

The most efficient way would be to pay all the 4 employees a yearly salary of 8,632£ and the rest in dividend divided by the 4. Don't forget that above 34,500£ individual dividend tax changes from 7.5% to 32.5%.

If you don't feel comfortable you should get an accountant, but this is the typical scenario they will probably put you on...

And as someone mentioned before, you must be asked why you're paying salary to the other 3, so they actually need to have some contribution to the company (income, paper work, other...)

Did they abolish the er-NI relief?

I wouldn't make said family members shareholders with just enough shares to get their dividends up to the tax threshold. Having them on the payroll in the first place is borderline already.

**sal** · 11 September 2019, 12:30

Originally posted by captainthunderpants555 View Post

Also the other thing is having loads of cash in the company is fine but oh man i want to see it working. Is there anything I can invest it in that doesn't incurr tax that is then easy to come back out of when it's time to pay VAT/corporation tax? always seems such a shame to leave it there idle waiting for the taxman.

You can put it into a savings account in YourCo name and get 1-2% interests. Everything else is rarely worth the hassle.

**CryingSheep** · 11 September 2019, 13:29

Originally posted by sal View Post

Did they abolish the er-NI relief?

I wouldn't make said family members shareholders with just enough shares to get their dividends up to the tax threshold. Having them on the payroll in the first place is borderline already.

Agree

Dividends Salary Investments - Stupid questions!