Reply to: Low Salary High Divvies

[Zero Liability]

For 2013/14, he has stated that the salary is recorded as a full year's lump sum that can be drawn down throughout the course of the year, to minimise the number of submissions under RTI.

For 2012/2013, it's more complicated as I began trading in the middle of the year, after having worked elsewhere on an employed basis.

[Greg@CapitalCity]

Have any of the accountants on here got an idea as to why this is?

No idea. From a cash flow perspective our clients like to take what they can from the business each month. It works better than hoarding cash until 31 Mar and making a lump sum salary payment then. It also works for clients who have very little retained earnings. If you are flush with cash, and the timing of the salary payment is meaningless to your needs, then a lump sum would work fine. There are no NI implications when comparing to the £641 per month option.

The only caveat I will put on that is if you start trading partway through the tax year. Speak with your accountant about the best salary level for you if this applies.

[Zero Liability]

Paying as a lump sum has been discussed before - many accountants advise against it, but I forget the reasons why (possibly to do with NI?)

Have any of the accountants on here got an idea as to why this is?

[d000hg]

Then aside from this subject on divs/salaries, I'm surprised there's so much panic across the boards re; IR35. If you're not Ltd, and you operate through a brolly, then what's the problem?

Those who aren't Ltd don't feel the need to join the conversation or ask questions about how many cups of tea they can claim on expenses, they just get on with working with no need of CUK!

[Sausage Surprise]

You could also argue that IR35 has been a huge success at deterring people from incorporating as LTD companies so there has been a huge net gain to the exchequer....

Very good point. I know lots of contractors that cough up to the tax man without so much as a whimper because of the perceived threat of IR35.

[VectraMan]

You could also argue that IR35 has been a huge success at deterring people from incorporating as LTD companies so there has been a huge net gain to the exchequer....

That's certainly true. The figures of the investigations doesn't account for all those who were scared into going umbrella, or taking permanent jobs instead. And if HMRC were to come out with a statement saying they are targeting low salary/high divs, then a lot of contractors would start paying higher salaries, which would raise more tax.

I have to admit, although I've ended up as a permie, last time round I was thinking if I get another contract I might just operate inside IR35 and save myself all the hassle.

[SteelyDan]

Probably but I don't believe most people operate as Ltds, or at least not a huge majority... do we have any idea Ltd/brolly split?

Then aside from this subject on divs/salaries, I'm surprised there's so much panic across the boards re; IR35. If you're not Ltd, and you operate through a brolly, then what's the problem?

[DirtyDog]

My accountant has advised going with £641pm as an annualised lump sum, i.e. at the primary threshold.

Paying as a lump sum has been discussed before - many accountants advise against it, but I forget the reasons why (possibly to do with NI?)

[d000hg]

Sorry but I'm not getting this at all:

All of us who operate as directors of a limited co, will (I think):

• Take minimum salary (in line with permissible levels as advised by our accountant)
• Take dividends (to supplement the minimum salary)
• Have high turnovers (unless we are 'benched')
• Keep expenses to a minimum (as any business would in order to ensure we have enough profits to take dividends)

If this is true, then most of us on here are prime targets, are we not?

Probably but I don't believe most people operate as Ltds, or at least not a huge majority... do we have any idea Ltd/brolly split?

Also, assuming everyone who runs a Ltd takes a tiny salary is probably incorrect. I'm sure loads take it all as salary or pay themselves a more typical wage for the work they do, or pay themselves a salary that meets their monthly financial outgoings, etc

[Zero Liability]

We'll see what comes of that. It depends on what the Lords' intention is. Assuming they just want to gobble up more taxpayer revenue (and aren't interested in the vibrance of the economy in general and just want short-term gains), surely extending the number of investigations will do little to improve its cost-benefit ratio (on the assumption that they are already going for contractors with a promising turnover)? There was the proposal of putting the burden on the end clients/intermediaries, but I would imagine that would have to be weighed up against the resources these entities have to marshal a good defence, e.g. compared to contractors who may not even have considered legal representation. They could always just change the rules, of course, but IR35 looks like a pretty decent deterrent even if the pelf it brings in directly is meagre.

I guess what really matters is what sort of ratio they consider disproportionate, along with any other factors they consider. I would think it would be one where particularly high dividends are involved, or else they're just chasing small prey and wasting funds.

[MPwannadecentincome]

Yes but bearing in mind the number of PSCs, and the capacity for investigations they currently have (barely even 0.1% of the population, if the 200k figure is correct), would they not target cases which could net them higher returns? I mean in reality, if the salary is low, the higher the dividends, the higher the ratio of them to salary will be anyway.

Exactly the point I think the Lords have taken away from the Committee witness statements

[Zero Liability]

Yes but bearing in mind the number of PSCs, and the capacity for investigations they currently have (barely even 0.1% of the population, if the 200k figure is correct), would they not target cases which could net them higher returns? I mean in reality, if the salary is low, the higher the dividends, the higher the ratio of them to salary will be anyway.

[MPwannadecentincome]

A few people have mentioned turnovers here. What was mentioned at the Lords Committee was the RATIO of dividends vs salary as declared on the PSC question in the tax return.

[Wanderer]

In terms of tax recovered IR35 investigations have been a complete disaster over the years.

You could also argue that IR35 has been a huge success at deterring people from incorporating as LTD companies so there has been a huge net gain to the exchequer....

[GB9]

Sorry but I'm not getting this at all:

All of us who operate as directors of a limited co, will (I think):

• Take minimum salary (in line with permissible levels as advised by our accountant)
• Take dividends (to supplement the minimum salary)
• Have high turnovers (unless we are 'benched')
• Keep expenses to a minimum (as any business would in order to ensure we have enough profits to take dividends)

If this is true, then most of us on here are prime targets, are we not?

Yes. And they will find people who should have paid more tax.

Personally I take a higher salary than I need to but that's personal choice / stupidity dependent upon who you listen to. There is nothing wrong with taking a minimum salary and paying the rest as dividends if outside IR35.