Reply to: Paying salary and dividends question

[Bigbird]

If you were investigated and lost, what would happen to the Corporation Tax you would have already paid?

My understanding is that the CT would be set off against any tax determination raised, because increasing the level of your salary would be an increased cost to the company leading to decreased profits and therefore decreased CT liability.

[Mustang]

Of course dont forget the fact that you can declare a dividend quarterly but draw it montly. ie. In April declare a dividend of £3000 and draw £1000 in April, £1000 in May and £1000 in June. That saves on the paperwork since you only need to produce one tax voucher and hold one Directors meeting to declare the dividend.

HTH

[pisces]

Ideally you'd pay £5K per year to maximize your income.

I don't think anybody knows for sure that a lower salary is more likely to trigger an investigation or not. For all we know they pick people out of a hat regardless of what they do. And if you are investigated and you win, then all you're doing by paying a larger salary is wasting money. After all, you're only following the law of the land.

On the other hand, if you lose, it won't matter how you paid yourself, you'll be stung for the full income tax and NI. So all we're doing is speculating that wasting a bit of money on tax means we're more likely to get away with not having to pay more.

If you were investigated and lost, what would happen to the Corporation Tax you would have already paid?

[ASB]

I never said that they were. What I did say is that you are more likely to be investigated for any reason if there are some dubious patterns on your business account. My accountant has advised not to claim monthly divis for this reason.

That is common advice.

However it is not likely to increase the risk of an investigation since the fact that monthy dividends have been paid is not available to the tax man. [Ok he could pull the company bank details under order from your bankers and do the maths but in this case you're already under investigation, just don't know it].

[Nixon Williams]

Maybe not now, but is this likely to be the case in years to come. I tend to think ahead and just because everything is rosy now with few investigations and even fewer successes that doens't mean that this trend will continue. Also, don't forget, that investigations can be for business activity going back 6 years and the IR can recoup monies from this far back.

The Revenue cannot investigate dividend payments that are legally declared as per the Companies Act. Whilst it is open for Gordon to legilslate in the future there is nothing illegal with monthly dividends.

Alan

[Nixon Williams]

what about the fact that for a company to operate legally it has to be classed as a 'going' concern - if you clear you accounts down to nothing at the end of each year (and therefore report NO yearly profit)
is this not a little bit dodgy???

or does no one really care?

Nothing illegal or dodgy about paying profits from the company. A going concern relates to if the company can pay its bill as they fall due, any decent accountant will ensure this is the case.

Alan

[Nixon Williams]

I have read somewhere that HMRC could regard this as a salary if it is paid monthly (a bit like a salary, in fact)

The fat that you read it somewhere does not make it tax law! There is no basis for this rumour.

Alan

[jh0711]

what about the fact that for a company to operate legally it has to be classed as a 'going' concern - if you clear you accounts down to nothing at the end of each year (and therefore report NO yearly profit)
is this not a little bit dodgy???

or does no one really care?

[Tool]

There is no basis for this other than an urban myth. Provided you can show that dividends are paid from profits (which we can for our clients) then you can pay dividends monthly.

I have read somewhere that HMRC could regard this as a salary if it is paid monthly (a bit like a salary, in fact)

[Tool]

Panamco,

A salary of 10k is not likely to put yourself out of Hector's radar, as long as you receive significant amount of dividends, because it will all be on your tax return (and you will have to fill one).

Some people here apparently are happy to maximise their tax burden, but the truth is that you have the right to structure your business to minimise your overall tax liability. Just do it legally. Paying yourself a low salary and high dividends is legal.

Regarding your final question, it is more efficient to draw some dividends every year, because it is virtually tax-free as long as your are not a high-rate tax payer.

I am not qualified to tell you that (c) The Lone Gunman

[Maxamus]

Once you take out NI/PAYE/Corp Tax/Expenses/Salary the rest would be profit which can be taken is divident.

Doesnt matter when you draw it as divident will always come out of profits.

[Nixon Williams]

You should only consider drawing divis quarterly, and preferably half annually or annually, if at all, and for the right reasons. If you can't do this, then just up your salary so that you can live off your income properly.

There is no basis for this other than an urban myth. Provided you can show that dividends are paid from profits (which we can for our clients) then you can pay dividends monthly.

Alan

[VectraMan]

- failure to administer your company payroll properly (i.e. forgetting to send in the yellow PAYE slips on time all of the time).

That's a bit of a worry as I had one reminder, and now they've sent me another one for a payment that I made on time. So HMRC cock up your PAYE account, and even though you've done everything right you get investigated. And it's impossible to phone them.

[XLMonkey]

I don't think anybody knows for sure that a lower salary is more likely to trigger an investigation or not. For all we know they pick people out of a hat regardless of what they do.

I do know, and (although the exact policy varies), they rarely do it based on salary alone. The things that are most likely to trigger an investigation are:
- a big change in the amount of personal tax that you have paid (so, someone goes from paying 25k/year in PAYE tax to paying 1k/year).
- failure to administer your company payroll properly (i.e. forgetting to send in the yellow PAYE slips on time all of the time).

There are occasional trawls that they do when they pick at random, but these are infrequent (and becoming less so, given how poor the success rate is). Issues like 5k vs. minimum wage vs. market salary come into the picture AFTER the investigation has started, rather than CAUSING the investigation to start in the first place.

For peace of mind, you need to be able to justify to yourself what your salary policy is, rather than worrying about what'll happen in the event of an investigation. (for me, I'm very comfortable justifying my minimum wage policy, and will do so if investigated. But everyone has to justify it based on their own circumstances)

[Nixon Williams]

My view is that you should pay a salary in line with the minimum wage, which is around £10K per annum.

The rest of the income can be taken as dividends, provided these are paid from profits they can be paid monthly. We calculate the profits each month for our clients, so a monthly payment is not a problem.

Alan