Reply to: Requirements of Limited Companies

[Goya]

I hope this helps.

Alan

Many thanks Nixon,

TM

Are you really sure contracting is for you?

[Nixon Williams]

Many thanks Nixon,

and dividend payments are only possible when the contract is not affected by IR35? Do you ensure this with your clients also?

TM

Dividends are possible within IR35 but in reality very little profit is left, however any that is left can be paid as a dividend.

Not sure what you mean with reference to our clients, if they are caught by IR35 then most of their income is paid as salary, if there is any profit left they can take a dividend. This is usually done when we issue the draft annual accounts.

Alan

[themistry]

I hope this helps.

Alan

Many thanks Nixon,

and dividend payments are only possible when the contract is not affected by IR35? Do you ensure this with your clients also?

TM

[Nixon Williams]

The one facet I do not know the answer to is if dividend payments are fully taxed? I.e. if I earn £15k min wage but take £50k in dividends over a year, will approx £30k of that (of my £65k total) be taxed at 40%, £30k at 22% etc? If not, how do dividends work?

And continuing from monkeygeorge's post, how often can dividends be claimed, both technically (i.e. can you claim one every day) and realistically (in the eyes of HMRC)?

Thanks again for your help!
TM

In 2006/07 if you took £50K in divs then the gross dividend would be £55,556, added to the salary would give a total income of £70,556.

Assuming the salary has been taxed under PAYE etc, then the extra tax due on the dividends would be (£70556-£38335) X 22.5% = £7249.73

There is no restriction on how often dividends can be paid but they must be paid from profits. Most businesses calculate profits monthly so in reality this is probably how often they could be done. We calculate profits monthly for our clients, some do them quarterly as it is more work!

I hope this helps.

Alan

[malvolio]

You're doing it again. The answers are published, on the web, in here and in the guides. Or you ask your accountant...

[themistry]

XLMonkey, thats exactly what I wanted to hear. Many thanks for this post!

i think the advice for buffering money is valid, however my situation at the moment is such that

1) I could go quite happily for some time without a contract renewal
2) I want to invest much of my money in personal ISAs (both mine and my wifes) etc and not in fee charging low interest company savings accounts.

The one facet I do not know the answer to is if dividend payments are fully taxed? I.e. if I earn £15k min wage but take £50k in dividends over a year, will approx £30k of that (of my £65k total) be taxed at 40%, £30k at 22% etc? If not, how do dividends work?

And continuing from monkeygeorge's post, how often can dividends be claimed, both technically (i.e. can you claim one every day) and realistically (in the eyes of HMRC)?

Thanks again for your help!
TM

[XLMonkey]

the key's in the last para - trying not to pay yourself everything that you earn. contracting's a pretty uncertain game and you can end up with periods out of work when you need to be living on savings. if you're paying yourself everything that you earn, every week, then the odds are that you'll be horribly vulnerable when the contract ends.

if you're not paying yourself everything that you earn, then it's just a case of building up a buffer of money and paying dividends less frequently.

of course, paying yourself less than you earn is rather easier said than done, particularly when the price of bananas has gone up so much.

[monkeygeorge]

I presume a lot of people would be using something similar to XLmonkey's srategy. But isn't it difficult surviving on the minimum wage and having to wait three months to get a payment?

I take it this is the safest way to do it to avoid being 'picked out'?

As I'm used to taking a dividend every week, this will be difficult for me to adjust to when I go limited in April.

It would be useful to hear other peoples' strategy.

[XLMonkey]

The radar is tricky, as its operated by HM Revenue and Customs, and they're not known for being the most helpful of souls. My view is that trying to second guess whether they will pick you out is pointless: you have to operate a strategy that you can justify to yourself. If you can do that (and you are operating legally), then HMRC can investigate all they want.

Everyone who does contracting takes their own view about what the best approach is: and they are known for defending their view energetically.

For what it's worth, my strategy is:
- I pay myself the National Minimum Wage
- I put an equivalent amount into a self invested pension each year
- I declare a dividend every six months, based on how well the company is doing. Sometimes the dividend is remarkably close to the amount I need to just reach the higher rate tax threshold. However, that's not why I do it (of course!)
- I take out the dividend in large chunks every quarter or so (remember: you can declare a dividend on one date and take the money out on another, or in instalments)
- I accumulate money in a high interest company savings account and will probably close the company in 2 years time and take advantage of the capital taper relief to release the money that's in there.

The only thing that I would strongly advise is: if you can avoid it, do not fall into the trap of taking as much money out as you can each month and spending it. You should always look to retain a significant amount in the company and never spend everything that you earn.

[malvolio]

So lesson learned - ask intelligent, relevant questions, get proper answers...

[themistry]

So some people think it better to stay off the radar

Hi malvolio, thanks for the response. This is what I wanted to know, what are the recommended practices for "staying of the radar"?

Thanks
TM

[malvolio]

This is an unanswerable question. It is perfectly permissable to take no salary at all and live on dividends. It is more sensible, especially to an accountant, to take enough salary to use up your 0% personal allowance (around £5k-ish, but it's a precise number) and the rest as divis.

Except, divis are not supposed to be a salary stream (in Hector's eyes at least) and there is a school of thought- borne out by the history of various tax investigations - where the low salary/routine divi route is a trigger for an investigation. So some people think it better to stay off the radar, pay a liveable salary (that pays net what you need to live on each month, not counting genuine business expenses of course) and take divis as and when you need/can afford them; the assumption is that behaving like a business is a good way to be seen as one. (Personally, I think investigations are triggered by sudden changes in patterns, rather than any particular model, or by poor timekeeping and/or quality of routine filings)

The low salary route is the most efficient and is fully legal. It's just a bit of a risk assessment exercise when nobody will admit what the risks really are.

[themistry]

So, now that its all done and dusted! In regards to a salary,

assuming u were earning a £100k contract, what would be the best way of "earning" this from your Limited company and what would you (or your accountant) need todo once a month to ensure it?

I understand that taking a minimum salary is fine, i.e. £15k, then taking dividends on top of this. However is this still allowed? What is to be made of corporation tax? Or does one make sure there is no "profit" left at the end of the year to be taxed on?

I think these were the little niggles I didnt see any comprehensive advice about.

Kind regards
TM

[To BI or not to BI?]

Im sorry, im not at all grumpy or angry, i appreciate being told where to look, that is exactly what I asked for (i.e. links etc appreciated). I just didn't expect an almost hatred felt tone as part of the response thats all.

TM

Just put it down on contractor training and character building excercise and move on. You'll definitely need those skills if you want to be a contractor

[themistry]

Look on it as a basic test: if you're going to get all pissy and upset at being told the you're being a dumbass in a non-PC, stuff-you kind of way, you're probably not going to be much use as a contractor. And if you can't cope with the attitude on here, how the hell will you manage in an office full of permies who think you're on 10 times their money?

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