Reply to: Dividends and salary

[psychocandy]

Monthly dividends should be avoided. Even though the tax man will only see the annualised figure from your company accounts as there is no need in them to show the frequency of distribution. However, should you be subject to an investigation and there are monthly dividend payments as evideneced by your dividend vouchers and bank statements, then the taxman will use the starting point of these are disguised salary payments, now prove otherwise. Don't forget, in the eyes of the taxman, you are guilty until you can prove you are innocent.

Evidence of this? Or just opinion?

Just realised I've agreed with 2 things NLUK has said on this thread as well.... ;-(

[psychocandy]

Based on a company turnover of about £100k or £440/day, I'd estimate that you are paying about £10,000/year in tax that you could avoid. Specifically:

1. Don't take more than £7488 (£624/month) salary.
2. If your wife has no other income then you should be paying her £7488 and income splitting with her by issuing her with shares.
3. Salary and dividends of around £70k combined will make you a higher rate tax payer so you have a nasty shock on the way when you do your self assessment.

Check out this calculator to verify what I've written above.

However, if you are happy to make a starbucks style "voluntary" donation to the exchequer then good on you! Each to their own.

No. Pay exactly £7488.

Not sure about paying the Mrs £7488. Got to be able to justify it remember? She can't do the books for an hour a month and get £624 for it.

Make her a shareholder of course and income split.

Keep both of your income below £42K to save even more tax if you can. e.g. Pay yourself £7K salary, £35K dividends, her £35K dividends.

Theoretically, you could massage the share percentage to give her more (to use up her £7K not used) but its probably not a good idea. Stick with 50/50 or HMRC might kick off if its 55/45 (or you keep changing it to suit yourself).

[psychocandy]

I would argue from personal experience you don't. I would rather a mail an accountant with 11000 contractors on the book than go talk face to face to someone who doesn't know what they are doing. I have been with SJD for 6 years and never met a single person but they reply to mails on the same day and I very rarely call and can't speak to my accountant. The thing is they are good enough to not really need me to mail or call them. I remember from previous posts that Nixon Williams, InTouch etc have exactly the same feedback. Knowledge > locality in my book.

Paying tax needlessly on £12.5k is a good reason not to go with a local setup.

Each to his own at the end of the day but after this mess I would re-look at my options.

WHS. Never spoke to my account manager at NW. I email and he replies same day which is good enough for me.

[psychocandy]

Just a thought but we started paying monthly dividends as couldn't afford to do otherwise. Is that maybe what the accountant was concerned about in the event of an investigation? Why does it matter when the divs are taken as long as we can demonstrate that there was distributable profit in the account at the time (ie set aside in separate account for VAT and corp tax liabilities)?

Anyone? Think this might me the crux of the matter

Another myth. Monthly dividends make no difference at all.

You could daily dividends if you wanted. No concern of HMRC how your business is run as long as its run legally and, as you say, there profit to be taken.

[muser]

I'd say that's probably it, rather than my actual use of the cash. However at the end of the day if you're unlucky enough to be investigated, surely any look at your personal finances would yield the information that you are using all or part of your dividends to pay your way in life, therefore effectively using it like salary?

I continue to be confused as to what a dividend is supposed to be actually FOR. Whether its paid annually, monthly or daily, if you use it in the way you would otherwise use your salary, or in addition to your salary, then it's effectively your wages regardless of the vehicle for payment.

Guess this one could run and run...but thanks everyone for such helpful comments and lots to think about. Cheers

Let's try this simple model for size and see if it works...

Arab Ltd is a company that trades and gets paid for its services. A separate legal entity.

Arab Ltd (like all company) requires 3 different kinds of people/roles to operate. Business Owner, Director and worker(s).
So there are Arab the Business Owner, Arab the Director and Arab the worker. The fact that the 3 roles are filled by the same person is incidental as they could be 3 *different* people. On the basis of this thread, Arab the Business Owner could and probably should fire Arab the Director.

Arab the Director pays Arab the worker a regular wage.
Arab the Director also pays Arab the Business Owner regular dividend.

Again, the fact that the wage and dividend are paid to the same person and perhaps even into the same personal account for worker and business owner is incidental.

If Arab the worker resigns or is fired, Arab the Director may choose to hire Mr/Ms Joe/Jo Bloggs as new worker. A whole set of different rules now applies but end result is that wage is now paid to a separate individual and into a separate personal account.

[psychocandy]

£20K paye, + £20k "every few months" is well into the higher tax bracket. If you've come from a permie PAYE job in this tax year, then probably all of it will be higher rate. I avoid that, so not completely clued up on this area, but my understanding is that you're expected to take the same income next year as this year, and they'll take some of the tax in advance if you go into the higher bracket - maybe one of the financial bods could confirm how this works. Perhaps could explain the tax code?

Do you understand that all your income is subject to tax - whether taken as salary or divvies. The difference is that divvies have already been taxed up to the lower rate. If you're taking £100K, you'll be taxed on £100K. The saving between salary and divvies is on NI (assuming you're outside IR35) - that's why a lower salary is recommended.

Funny just been reading the thread about NW being expensive.

I can guarantee they would have advised how best to set things up. As it is, methinks OP has paid much more in tax and NI than they really needed to.

Good accountant pays for themselves and all that....

[psychocandy]

Reading between the lines I don't think this is what he is saying. It sounds to me that he is not comfortable with a contractor set up and sees the stay below tax threshold and divi rest out as a tax dodge. The fact he suggests a 20k salary would back this up. If he knew the system and was comfortable with it he would have gone the whole hog and said £7488 salary like contractor accountants do. OP is paying tax on 8-9k because of the accountants inexperience in this area.

FTFY. No need to waste money on things like NI....

[psychocandy]

Thanks and in answer to the previous poster...I think he's worried that my dividends look like they're being used for what my salary was previously used for. He doesn't want dividends to look like I'm treating them as a replacement for my salary.....

Walk into his office and say "IR35". If he looks at you blankly get another accountant.

[muser]

I am baffled. Has Mrs Arab hacked into Arab's account to post these questions?
Assuming that is not the case, I can also understand why the Accountant was being *seen* as evasive.

What these questions show is that if HMRC ever decides to conduct an audit, the odds would be good that you'll get yourself and the Accountant into serious trouble.

[Wanderer]

No, you pay an additional 25% on dividends that put your gross income above the higher rate band. Remember that your company pays corporation tax on any profits first. There is a 10% ordinary dividend tax below the higher rate band but there is also a 10% tax credit. Effectively, you need to set aside 25% of any dividend received as a higher-rate tax payer, noting that you have to gross up any net dividend received (or any other net income) to compare with the higher rate bracket. Like others have said, some preliminary reading might be good, and if I read you correctly, you could be in for a shock come self-assessment time....

And then to confuse things even more, you get hit with a payment on account which appears out of the blue and is unrelated to the actual amount earned in the current tax year (I'm not going to be a higher rate taxpayer again). I now find out I can reduce this. Blah, my accountant never offered me that information though.

Grossed up net dividends, dividend tax, tax credit, arrrgggh. And we wonder why people mess this up? Even after years of doing it, this makes my head spin.

Who was it that said "tax shouldn't be taxing" ???

[LisaContractorUmbrella]

I have change my mind.. I think I know why his accountant was evasive. Whatever he said would go right over the OP's head.

I am changing my advice... OP's Accountant... Get a new client. Some money just isn't worth it.

[northernladuk]

Message to OP's accountant... Get a new client.

I have change my mind.. I think I know why his accountant was evasive. Whatever he said would go right over the OP's head.

I am changing my advice... OP's Accountant... Get a new client. Some money just isn't worth it.

[jamesbrown]

If I've understood correctly I will pay effective 25% on dividend income taken above the current limit of around £33k (don't have exact fig to hand). I tend to think of higher rate tax as 40% from my PAYE days so that may have caused confusion. Anyhow, 25% seems reasonable to me

No, you pay an additional 25% on dividends that put your gross income above the higher rate band. Remember that your company pays corporation tax on any profits first. There is a 10% ordinary dividend tax below the higher rate band but there is also a 10% tax credit. Effectively, you need to set aside 25% of any dividend received as a higher-rate tax payer, noting that you have to gross up any net dividend received (or any other net income) to compare with the higher rate bracket. Like others have said, some preliminary reading might be good, and if I read you correctly, you could be in for a shock come self-assessment time....

[mudskipper]

If I've understood correctly I will pay effective 25% on dividend income taken above the current limit of around £33k (don't have exact fig to hand). I tend to think of higher rate tax as 40% from my PAYE days so that may have caused confusion. Anyhow, 25% seems reasonable to me

Yes, but you also owe 20% corp tax on your divvies before you take them (which you don't on PAYE). So overall it's about the same. The real difference in divvies vs PAYE is the NI.

[Arab]

Clarification

Agreed - if you have salary of £20k through PAYE then divs are £50k which means you will be paying higher rate tax

If I've understood correctly I will pay effective 25% on dividend income taken above the current limit of around £33k (don't have exact fig to hand). I tend to think of higher rate tax as 40% from my PAYE days so that may have caused confusion. Anyhow, 25% seems reasonable to me