Reply to: Is reducing Director salary tax avoidance?

[Zero Liability]

Yes, but bear in mind the money funnelled into ISAs is already taxed at other sources. Putting money into a pension, on the other hand, reduces your liabilities. In the end they are just whining that people are intelligent enough to protect their income through the govt's own idiotic, arbitrarily designed earning categorisations.

[borderreiver]

Claiming expenses is tax avoidance...you could just pay it personally and not claim, but the reason you claim is predominantly to reduce your tax bill.

I do think that the government are largely to blame here though. When I studied, it was crystal clear, tax evasion = illegal and bad, tax avoidance = legal and good. The waters seem to be muddied these days, with phrases like "aggressive avoidance".

Well, quite. Strictly speaking, even holding an ISA is tax avoidance

IMHO it's disingenuous of HMRC or HMG to wail about avoidance or even "aggressive" avoidance. If something's not OK, change the law to disallow it. End of story.

[Contreras]

If it were to be seen as tax avoidance (in a bad way) then it's not much of a stretch to consider only working 6 months of the year and spending the other 6 on a beach as tax avoidance (in a bad way).

It takes you 6 months to bill £7.6k ?

As soon as you assume that the salary should be in proportion to a director's fee earning then any salary/dividend split becomes tax avoidance and a few £k up or down won't change that.

[ContrataxLtd]

Claiming expenses is tax avoidance...you could just pay it personally and not claim, but the reason you claim is predominantly to reduce your tax bill.

I do think that the government are largely to blame here though. When I studied, it was crystal clear, tax evasion = illegal and bad, tax avoidance = legal and good. The waters seem to be muddied these days, with phrases like "aggressive avoidance".

Seems like more and more things HMRC related are becoming grey areas, with fewer black and white rules. IR35 being a perfect example.

Couldn't agree more!

Martin

[SpontaneousOrder]

If it were to be seen as tax avoidance (in a bad way) then it's not much of a stretch to consider only working 6 months of the year and spending the other 6 on a beach as tax avoidance (in a bad way).

[Maslins]

+1

Far too much bedwetting going on here, I think.

Claiming expenses is tax avoidance...you could just pay it personally and not claim, but the reason you claim is predominantly to reduce your tax bill.

I do think that the government are largely to blame here though. When I studied, it was crystal clear, tax evasion = illegal and bad, tax avoidance = legal and good. The waters seem to be muddied these days, with phrases like "aggressive avoidance".

Seems like more and more things HMRC related are becoming grey areas, with fewer black and white rules. IR35 being a perfect example.

[cojak]

+1

Far too much bedwetting going on here, I think.

Whatever lets you sleep at night.

[borderreiver]

Since when did tax avoidance become illegal?

+1

Far too much bedwetting going on here, I think.

[Martin at NixonWilliams]

His thinking behind this is that the main reason, if not the only reason, to reduce the director salary would be to avoid tax, therefor this could be lead HMRC to believe it is tax avoidance.

Since when did tax avoidance become illegal?

You only have an issue with overly aggresive tax avoidance, such as offshore arrangements where payments of salary are disguised as loans. Increasing and decreasing your salary from £7,956 to £10,000 and vice versa is hardly aggresive.

A director is not subject to the NMW rules providing there is no written contract of employment so I do not see an issue with this at all.

It would not be a transaction with a director that is held at arms length. If you were a normal employee and not a director it would not be believable that you are expected to do the same work, but for a reduced remuneration.

True, decreasing the salary wouldn't be an 'arms length' transaction, but neither would the decision to pay £7,956 or £10,000 in the first instance if you are earning towards £100,000, as is the case with a lot of contractors.

[Zero Liability]

I wonder if HMRC will see pushing it up to £10k and then applying the employer's allowance as potentially pushing the limits.

[cojak]

I'm paying more than the minimum but that's nobody's business but my own.

[TheCyclingProgrammer]

Sounds like being overly cautious for the sake of it. Yes, its a means of avoiding tax in the strictest sense if the only reason you're doing it is to reduce your overall tax contribution but a) how would HMRC know why you've changed your salary? and b) there's not a whole lot that HMRC can do about it anyway.

Businesses can pay their employees whatever they like (subject to NMW in most cases although probably not in our case) and HMRC are more likely to be interested if you're paying somebody a salary that's excessive or for not actually doing anything (where they could disallow it for CT purposes as the salary wouldn't pass the wholly and exclusively rule).

If you're the sole shareholder of YourCo, you should certainly consider taking the full £10k salary as in most cases it is the most tax efficient salary (if you're not the only sole shareholder, you may want to stick to a salary at or near the NI threshold).

[northernladuk]

You could argue being a director of a one man IT LTD and paying minimum wage is tax avoidance but lets not go there hey

[cojak]

When I went to see the accountant I'm moving to I asked about this - going to £10K salary and applying for the NI relief and was also told that it really didn't make much of a difference either way with regards to take home.

I'll be moving to £10K for other reasons, and if the changes are reversed and I end up paying a little bit more to HMRC then I'll live with it.

I'm doing the same and I have no problems with the situation if things change - I'll live with it too.

To the amazement of many, screwing as much money out of the company as I can is not the reason I'm in business...

[Clare@InTouch]

I don't think it's tax avoidance at all, there can be many reasons to increase or decrease a salary.

The most tax efficient salary is generally going to be £10,000 as it's covered by your personal allowance, gets CT relief, the employee's NI is minimal and you can probably claim the Employer's Allowance to cover the Employer's NI.

There is an argument to be had about National Minimum Wage, but that's been done in other threads!