Reply to: How much salary do you pay yourself?

[ASB]

I think the clear indication would be someone who keeps on paying the same amount of dividend every month over a very long period. So I guess if I pay myself £145 a week in salary and £1000 in dividend every week for say few years, that is going to be flagged as a potential IR35 case.
I may be wrong in presuming some things, but this is my idea, so I tent to pay different amount of divs every month, and sometimes even avoid them a month.
I may be wrong, but this would be my 2p.

And - pre enquiry - just how would HMRC know what you pay in any given day/week/month?

If they are digging enough to find this out - which would involve getting all the bank details and a large amount of guesswork then you are already well and truly on the radar (and they could problably not legally get to this level of information before investgation).

HMRC will only know the amount of dividends you have received from your tax return, they may correlate to the companys filed accounts, but there is no guarantee the reporting periods will tally so again a certain amount of guesswork (pre enquiry).

Regular monthly dividends of the same amount are not going to act as a trigger for an enquiry.

They are not going to affect the outcome of an IR35 case, they will potentially affect the outcome of an enquiry if the dividends are not properly minuted etc.

[Danielsjdaccountancy]

I'm sure HMRC review the whole package and not just salary…

Someone with

Turnover
Salary
Accountancy fees
General expenses
Very high dividends

I think is far more likely to be inspected than someone with

Turnover
Salary
Pension
Phone
PSA
Other genuine running expenses
Travel and subsistence
Accountancy fees
Company Assets
Dividends

Completely agree with this comment!

[Scrag Meister]

£1k a month gross, topped up each month from April 2011's divi in my savings account.

Took me a while to get to this relatively stable situation what with house purchases, getting married, clearing mortgage and other things over the past few years.

[Robot]

I'm sure HMRC review the whole package and not just salary…

Someone with

Turnover
Salary
Accountancy fees
General expenses
Very high dividends

I think is far more likely to be inspected than someone with

Turnover
Salary
Pension
Phone
PSA
Other genuine running expenses
Travel and subsistence
Accountancy fees
Company Assets
Dividends

[Taxless]

"The answer - there is no magic level."

Agreed.

"Yes its more tax efficient to pay no salary but the revenue could challenge this, crawl all over your books, the company contract, working practices and then more than likely drop a case due to it not being cost effective but do you really want to waste the time getting records up to scratch and spent worrying if you're the one they do choose?"

I wouldn't suggest no salary but I would suggest low salary. On what basis do you suggest HMRC can challenge this given my earlier comment on NMW?

In theory HMRC can challenge any entry within company accounts, tax returns etc., but they do not have the resources to open up large numbers of speculative enquiries and certainly wouldn't be starting enquiries based on level of salary alone, particularly where the level of dividends show a total remuneration pakage that could provide a reasonable standard of living.

"if you register £40K on your self-assessment with no tax being paid you may as well submit your tax return on pink paper because it will stand out and draw attention."

I certainly strongly disagree with this based on personal experience. We submit around 60-70 tax returns annually showing small salaries and dividends up to or near the basic rate banding. HMRC enquiries on these to date - ZERO!

You don't have to pay any more tax that you have to and the Courts agree. All that is being suggested is organising your affairs to (legally) minimise your tax exposure.

A lot of people seem to be worried about attracting an HMRC enquiry and on the IR35 side alone this is much more likely to arise from a combination of a number of factors including :

The fact that you operate as a one-man company;
The company's busines descrpition on its accounts/returns (Consultants, IT Contractor etc);
The industry sector you operate in;
Information HMRC have gleaned from an enquiry into your end client;
Information HMRC have gleaned from any Agency you may use.

HMRC have the power to obtain information from any organisation and they have used this extensively, ask any bank, estate agent, doctor, dentist and soon plumber.

[psychocandy]

Hmmm. Seems there are quite a lot of differing opinions about this...

[Danielsjdaccountancy]

The answer - there is no magic level.
Speaking to the PCG and attending accredited accountancy courses the advice is to pay some tax via a small salary.
Yes its more tax efficient to pay no salary but the revenue could challenge this, crawl all over your books, the company contract, working practices and then more than likely drop a case due to it not being cost effective but do you really want to waste the time getting records up to scratch and spent worrying if you're the one they do choose?
Our advice is don't let it get to this in the first place. Run the company tax efficiently and keep the tax man happy.
Yes the optimum take home would be to say personal allowance as salary and then tax free dividends but, if you register £40K on your self-assessment with no tax being paid you may as well submit your tax return on pink paper because it will stand out and draw attention.

Being able to contract through an Ltd company and being deemed to be outside IR35 is a privilege in some respects (yes there are the downsides, the recession has proved this). It can be very tax efficient and, if the company is managed correctly through its life, can achieve around 80% take home and that includes paying company and personal taxes as well!

[Fred Bloggs]

I think the clear indication would be someone who keeps on paying the same amount of dividend every month over a very long period. So I guess if I pay myself £145 a week in salary and £1000 in dividend every week for say few years, that is going to be flagged as a potential IR35 case.
I may be wrong in presuming some things, but this is my idea, so I tent to pay different amount of divs every month, and sometimes even avoid them a month.
I may be wrong, but this would be my 2p.

But, there again, HMRC have no say in when a Ltd Co declares dividends. I declare dividends quarterly, but I could just as easily declare weekly or daily if I wanted to.

[rd409]

I think the clear indication would be someone who keeps on paying the same amount of dividend every month over a very long period. So I guess if I pay myself £145 a week in salary and £1000 in dividend every week for say few years, that is going to be flagged as a potential IR35 case.
I may be wrong in presuming some things, but this is my idea, so I tent to pay different amount of divs every month, and sometimes even avoid them a month.
I may be wrong, but this would be my 2p.

[Fred Bloggs]

Some time ago a Parliamentary select commitee told HMRC that their random enquiries were not cost effective and so if you get an enquiry now, your company will almost certainly have been subject to some risk assessment at HMRC and they are getting better at this because they don't have the resources to beggar about so make much more use of modern technology.

The main risk for most people on this site will probably be - Does my company fall foul of IR35?

Exactly so, but how do they assess you for risk of IR35? Before they select you, they will not have seen a contract, they will have no idea about workig practices. How do they assess you for IR35 non compliance?

[Taxless]

As a director of your own company, provided you do not have a formal employment contract, which would be pretty unusal, you can pay yourself as little as you want as a salary, all the way down to zero and HMRC cannot challenge it.

In these circumstances you are not covered by the National Minimum Wage legislation which is why you can pay so little.

The small salary supported by dividends is a very basic planning ploy for a lot of smaller companies, not just those potentially within the IR35 sphere.

HMRC have no authority to challenge the level of salary taken and they would not use that as a means of selecting any specific case for enquiry.

Some time ago a Parliamentary select commitee told HMRC that their random enquiries were not cost effective and so if you get an enquiry now, your company will almost certainly have been subject to some risk assessment at HMRC and they are getting better at this because they don't have the resources to beggar about so make much more use of modern technology.

The main risk for most people on this site will probably be - Does my company fall foul of IR35?

[backrubber]

I pay myself £22000 per year... probably completely crazy I know !

[Jog On]

In matters such as this, I always ask myself 'What would Sir Philip Green do?'

Quite right - we can only follow the lead of our esteemed business leaders and HMRC officials - shining examples that they are..

I've been paying £1k/month net (about ~£14k gross?)

I might appoint someone from HMRC like Richard Broadbent though to see how much tax I can save - he's done wonders for Barclays (something like £113M corp tax on about £4B profit - bet he got a nice bonus for that!) and off to Tesco now as they obviously need more help paying their 'fair share' as well.

We're all in this together folks

[Bugbait]

I pay myself £15k gross a year. Yes, it's way more than arguably "needed" but I've been "randomly" audited once and prefer to not give HMRC any reason to dig too deep.

[pmeswani]

In matters such as this, I always ask myself 'What would Sir Philip Green do?'

Well, I ain't gonna be taking a music show to America for sure.