Reply to: What's the minimum salary I can pay myself?

[Peter Loew]

You own the shares of your company and you are entitled to a distribution of it's profit by way of dividend.

You must remember that the company is a distinct entity seperate to yourself. You have seperate roles within it as an owner and as a director.

The company pays you a dividend as a shareholder as a distribution of profit and the company pays you remuneration as a director. In the absence of a service agreement there is no legal obligation to pay you as a director the NMW.

Using your argument on the how do you live on £100 - what i'm saying is that you don't, you live on the £100 pw salary and X amount in dividend.

This underpins the whole basis of share ownership and investment though it is without doubt that HMRC will change the legislation in the not too distant future. In the meantime though, it is legal and good tax planning. IMO.

I see, thanks for the clarification. I was under the impression that it was precisely because of the "living off dividend" argument that they could act against you. But as you point out, this is an investment which we are legally entitled to.

[robnjc]

not read the whole thread so apologies if this has been cvovered - it also depends what your personal pension arrangements are - the Revenue limit the amount you can put is based on salary/age (but I'm willing to be corrected on this)

[Jason D]

My accountant said to pay £15k salary and the rest in divvies. Am I doing myself? Personally do0 a lot of miles so draw considerable expenses and then anything over the 40% threashold I pay into a pension.

You are paying £350.74 per month in NI/ENI and IT more than you have to. I can just about live with the NMW argument but £15k? What reasoning did he have for this?

[Hiram King Of Tyre]

My accountant said to pay £15k salary and the rest in divvies. Am I doing myself? Personally do0 a lot of miles so draw considerable expenses and then anything over the 40% threashold I pay into a pension.

[css_jay99]

I was just thinking that it would be easy to shut HMRC up big time by doing something like this :-

Mr X contracts via X LTD for which he owns 1% (99% shares owned by MR Y)
Mr Y contracts via Y LTD for which he owns 1% (99% shares owned by MR X)

They are both paid NMW and both get 99% share of dividend .
Variations in Netprofit can be sorted out -- cash in hand under the radar !

conclusion:-
win win for Mr X & Y
Nothing Taxman can do becasue Mr X & Y are living fully off dividend income on companies they dont work for

how is that ?

css_jay99

[Jason D]

Peter

You own the shares of your company and you are entitled to a distribution of it's profit by way of dividend.

You must remember that the company is a distinct entity seperate to yourself. You have seperate roles within it as an owner and as a director.

The company pays you a dividend as a shareholder as a distribution of profit and the company pays you remuneration as a director. In the absence of a service agreement there is no legal obligation to pay you as a director the NMW.

Using your argument on the how do you live on £100 - what i'm saying is that you don't, you live on the £100 pw salary and X amount in dividend.

This underpins the whole basis of share ownership and investment though it is without doubt that HMRC will change the legislation in the not too distant future. In the meantime though, it is legal and good tax planning. IMO.

[Peter Loew]

The reason that you are paying yourself such a lowly salary is because you have another source of income from your share ownership. You are the owner of your company and you are acting in its best interests. Increase the salary and you will decrease the profit. Decrease the profit and you decrease your dividend stream. Dividends are from taxed profits anyway so there is no tax avoidence, the only avoidence is NI which is not relevent here.
If you can show me this action is illegal then please do.

Share ownership, what do you mean?

[Jason D]

You will never be prosecuted for not paying minimum wage, you will possibly be prosecuted for tax evasion.

Not sure, but wasn't there something with Ian Duncan Smith a while ago? Something about his wife being on the payroll and tax evasion...

That would be the rule about only paying your spouses the market rate (otherwise being disallowed for tax) not applying to MP's.

Following the Freedom of Information Act it was revealed that many MPs employ their wives and pay them well over the going rate, usually around 35k per annum plus perks.

Unsurprisingly, MP's have now voted to exempt themselves from disclosing these facts now

[Jason D]

That is true. But how many contractors do you think have enough substantial income other than from their contract day jobs.

Assuming you only have your full time day contract as the only source of income, how can you make the argument of being able to survive on £100 per week? You can't, and if you can't, then why are you paying yourself such a lowly salary? The only logical conclusion is that for all practical purposes you are avoiding income tax and living off dividends.

Though there is nothing illegal about it, they will infer you are tax-dodging because it's in their interests.

The reason that you are paying yourself such a lowly salary is because you have another source of income from your share ownership. You are the owner of your company and you are acting in its best interests. Increase the salary and you will decrease the profit. Decrease the profit and you decrease your dividend stream. Dividends are from taxed profits anyway so there is no tax avoidence, the only avoidence is NI which is not relevent here.
If you can show me this action is illegal then please do.

[Peter Loew]

Quite right. Pay yourself whatever you feel like. Wait and see if you are ever prosecuted for not paying minimum wage.

Can't recall reading about such a case. But maybe you'd be the first.

You will never be prosecuted for not paying minimum wage, you will possibly be prosecuted for tax evasion.

Not sure, but wasn't there something with Ian Duncan Smith a while ago? Something about his wife being on the payroll and tax evasion...

[Peter Loew]

How could they?

There are many forms of income be it salary, rental, royalties, investments, trading, share ownership etc etc

Many people have no salary income and have huge income.

There is nothing illegal in drawing a low wage and the rest through dividends, someone show me otherwise.

That is true. But how many contractors do you think have enough substantial income other than from their contract day jobs.

Assuming you only have your full time day contract as the only source of income, how can you make the argument of being able to survive on £100 per week? You can't, and if you can't, then why are you paying yourself such a lowly salary? The only logical conclusion is that for all practical purposes you are avoiding income tax and living off dividends.

Though there is nothing illegal about it, they will infer you are tax-dodging because it's in their interests.

[ctdctd]

I have started paying myself the minimum wage as the tax and NI burden of the two combined is under 20% (Gross Salary £897, Tax and Employer/Employees NI about £177) so it seems to me that there is nothing to gain by paying a smaller salary but getting the resultant dividend taxed at 20%? And this keeps things "Under the Radar" which seems to be a good thing to do! Also means I get some of the NI back as I'm contracted out of SERP's - or whatever it is called today.

Or am I missing something?

[NotAllThere]

Quite right. Pay yourself whatever you feel like. Wait and see if you are ever prosecuted for not paying minimum wage.

Can't recall reading about such a case. But maybe you'd be the first.

[Jason D]

?

How could they?

There are many forms of income be it salary, rental, royalties, investments, trading, share ownership etc etc

Many people have no salary income and have huge income.

There is nothing illegal in drawing a low wage and the rest through dividends, someone show me otherwise.

[gables]

Yes, and I intend to pay myself a monthly salary that is in line with minimum wage. However, the minimum wage is set at an hourly rate.

Therefore, how many hours per week are considered "full time" for the basis of a salary that is above minimum wage?

The reason for asking this is that if I were to write myself a contract that said my monthly salary was based on 10 hours per week, with overtime voluntary and unpaid, this would clearly be nonsense. There must be a reasonable minimum number of hours which are considered full time for salary purposes.

I'm working full time at the moment (albeit temporary) and work 35 hours per week. My wife works full time and she does 37.5 hours a week. When I was contracting I considered 40 hours a week as standard, some of the permies I worked with were doing very much more

I'd go for either 35 or 37.5 hours per week.

HTH