Salary Vs Dividend

[pav]

Trying to work out the most cost effective way of running a ltd company. Take a salary of £5,000 and the rest in dividend or pay a higher salary and less in dividend.

 

Without going into detail I know this will be a tricky one but just wanted to get opinions. . .

[Piebob]

Not sure what the current rates are but dividend used to make more sense - c.20-odd% tax as opposed to (presumably) 40%.

 

Use caution, and get a good accountant. Don't know your line of work but you need to make sure your contracts don't fall foul of IR35 legislation. The tax man may come along at a later date, see your salary of £5k, think that it totally unrealistic and then reclaim full PAYE on what he deems to be a suitable salary. Does that make sense?

[pav]

Hi Piebob,

 

Yes makes perfect sense and someone else has raised the same point.

 

I have spoken to 5 accountants (both large firms and independents) all who say that taking a salary of £5k is acceptable in terms of law and it is just making the most of the boundaries and not stepping over them.

 

However some seem to be in favour of taking more dividends and some in favour of a higher normal salary which leaves me none the wiser! They all seem to have done different calculations as well when demonstrating the savings which is a real worry

[Piebob]

Go with the one that earns you more money I guess that's what accountants are for, it's just breaking up the pot differently. If they are confident then that'd be good enough for me. Try to find one that specialises in your line of work if you can, they'll have experience of dealing with taxation issues and what can and can't be put as expenses/re-investments/salary/dividends/costs/etc

[Dunkield]

Pay yourself a bit more, and you are less likely to appear on the 'radar'

 

I ran my own company for years and paid myself 500 quid a month, but the world was a slightly different place then. Find an accountant that alreday has sole traders on his books, you will be utterly amazed how many don't have a clue about it. Use their office as your registered address as well, so if anyone from the tax wants to see your books you don't have to be there to do it, your accountants can do it for you.

[Mungler]

Do NOT take dividends unless it is entirely safe to do so.

 

Dividends can only be distributed from profits. Lots of people run their companies showing a borderline profit (tax reasons again). If something happens with the company and it goes pop, the liquidator will make you repay (and will sue you for recovery) of all dividends paid in years where they can demonstrate that the company was not in profit.

 

I see this all the time and people more often get caught out later on - they take dividends in good years and don't get out of the habit in bad years.

[al4x]

We used to do this and have recently started taking 10K on the advice of our accountants. So that we do pay some tax and NI. Basically it saves an absolute fortune you pay 21% up to 35K then the difference between that and higher rate. It saves paying NI and company NI

[Jonsey]

It does depend on the type of business you are in.

 

I was an IT contractor for many years (back in the days when I actually did real work), paid myself £500 per month and a large dividend every quarter. I was contracted for 40 hours per week at a specific hourly rate for a 6 month period, it was entirely safe to take a dividend.

 

Then IR35 came in and that little avenue of pleasure was no more, at the time I couldn't find an accountant brave enough to find a way around it at the time so I started paying myself a more realistic salary and gave the Tax Man the proper amount. (broke my heart at the time) :o

[pin]

Then IR35 came in and that little avenue of pleasure was no more, at the time I couldn't find an accountant brave enough to find a way around it at the time so I started paying myself a more realistic salary and gave the Tax Man the proper amount. (broke my heart at the time) :o

 

That's what stopped me contracting and made me get a real job

[sweepy]

Hi Pav

was in same position regard wages so we get paid minium wage and the rest as a divvy each month you and the company save a fortune in NI but as mention before the divvy is of profits not running cost so still liable for tax

 

Sweepy

[Dr W]

The problem is, is that HMRC have hinted that if they think a director is only paying themselves a dividends to avoid paying tax then their view is that the can ignore what has been done and assess the person on a 'market' rate of pay and make them pay tax on that amount.

 

However it is your legal right as a director to pay yourself dividends out of profits and we (work for a firm of chartered accoutants) have not come across any cases where HMRC have done this.

 

if you pay yourself monthly dividends then you're leaving yourself a bit open than if you paid yourself quarterly or 6 monthly.

 

There is a difference between this and a person working through a company for another company as a contractor because then HMRC can say well actually you're just an employee of the company and the company 'employing' you should pay Employers NI.

 

These are two very different matters.

[al4x]

technically its mostly just avoiding paying NI. If your company is just you and you only work for one company I can see there are issues but if you have more clients and run a proper company at the moment there isn't an issue, the main point to remember is there are always bigeer fish to fry