Minimum salary for a Limited company shareholder.

[MnF]

Hi

I am just in the process of changing from a sole trader to a Ltd Company, and I getting lots of conflicting advice. The main reason I am changing is that I was told that I can have myself and my wife as shareholders, pay ourselves a minimum salary (about £7000/year each) that will keep us below the NI and income tax brackets and then take the rest as dividends. Two accountants have told me this is fine and common practice but two different accountants have said it this is like a red flag to HMRC and they will never believe that this is a legitimate salary. Does anyone do this currently and have HMRC ever questioned it? Any thoughts or advice would be very much appreciated- many thanks!

[Greg@CapitalCity]

Hi MnF,

You can look at this in two parts;
(1) Two shareholders. Yes, no problem with you both being shareholders, and each receiving dividends in proportion to your shareholdings. There are a few things you need to be careful of to ensure your wife's shares are not seen as a 'right to income', but this arrangement is common practice and although the HMRC have a dim view of the arrangement, just ensure you play by the rules under the current legislation.

(2) Salary. If your wife has a role in the company, and actually does work for it, and the salary can be justified for the work she does, then this will be fine. If the salary arrangement is just a sham, and your wife really does nothing for your company, then the HMRC won't like it.

[northernladuk]

You accountants are displaying their opinion of the level of risk to this. Paying your wife a salary for doing next to nothing and then giving her dividends to keep you under a tax threshold is clearly tax avoidance, something the goverment are coming down on hard at the moment. Some accountants are happy to say go ahead, they haven't seen this go wrong, others maybe don't have the experience of this and on paper/prinicple it doesn't look good.

As Greg says it is possible with a couple of gotcha's i.e trying to justify £7k to your wife for doing the books which won't cut it for example, but it is down to your level of risk aversion as to how far you go with this IMO.

This does get asked almost weekly and debated at great length. You can find all the other posts discussing this below. It is also mentioned in the Newbie guides to the right. Check out the S660 posts while you are at it for some background so you fully understand the situation..

wife site:forums.contractoruk.com/accounting-legal/ - Google Search

[MnF]

thanks, my wife does a large part of the admin, so does have a legitimate reason to have a salary. So just to clarify its not a red flag to HMRC to only pay ourselves £7000 salary and take the rest as dividends?

[Nixon Williams]

thanks, my wife does a large part of the admin, so does have a legitimate reason to have a salary. So just to clarify its not a red flag to HMRC to only pay ourselves £7000 salary and take the rest as dividends?

We would recommend a salary of £7488 for the current year, however with regards to your wife we generally would not suggest paying her a salary.

You could pay her a salary inline with the owrk she actually does but I cannot imagine that this would be more than say 1-2 hours per month and at that rate it is hardly worth processing a salary.

Alan

[Greg@CapitalCity]

thanks, my wife does a large part of the admin, so does have a legitimate reason to have a salary. So just to clarify its not a red flag to HMRC to only pay ourselves £7000 salary and take the rest as dividends?

If taking a salary of around £7,000 and paying the rest in dividends is a red flag to the HMRC, there will be tens of thousands of very concerned UK contractors. Its common practice, and from the last PAYE compliance visit we had (which admittedly was a while ago) the inspector asked our client "So, is your salary around £7,000 per year?". He answered "Yes" and the inspector moved on.

I would say you should concern yourself more with keeping a strong IR35 position.

[northernladuk]

We would recommend a salary of £7488 for the current year, however with regards to your wife we generally would not suggest paying her a salary.

You could pay her a salary inline with the owrk she actually does but I cannot imagine that this would be more than say 1-2 hours per month and at that rate it is hardly worth processing a salary.

Alan

This +1. You have to be pretty damn clear on your justifications. Would you pay someone you didn't know that amount for that little work. For most contractors the answer is no but eash situation is different. You have to becareful not to take the micky.

If taking a salary of around £7,000 and paying the rest in dividends is a red flag to the HMRC, there will be tens of thousands of very concerned UK contractors. Its common practice, and from the last PAYE compliance visit we had (which admittedly was a while ago) the inspector asked our client "So, is your salary around £7,000 per year?". He answered "Yes" and the inspector moved on..

And so there should be. I don't think this is to be taken lightly. The comment about the inspector is interesting though and some some real feedback which is great. My thought here though is if there is direct action to clamp down on our practices they will not be so flippant about it and will calling to check on that £7k surely? A general visit in days gone by I can see that is a reasonable approach but it isn't driven by a directive aimed at us which could be a danger in the current anti LTD situation?

[TheFaQQer]

thanks, my wife does a large part of the admin, so does have a legitimate reason to have a salary. So just to clarify its not a red flag to HMRC to only pay ourselves £7000 salary and take the rest as dividends?

No-one here can answer that question.

They may have an opinion (and there are plenty here who have different opinions on the matter), but since HMRC are a law unto themselves, anything anyone says on here represents their opinion and nothing more. You may get some accountants on here saying "we've never had a problem with it" (and in fact, you probably will!) - that still doesn't mean that it's a red flag to HMRC.

In the past, I've had two different accountants who have advised paying NMW rather than the lower rate. I've told both of them I understand the risks and that I would be paying the lower salary rather than NMW.

My argument is that if HMRC are going to argue that £7k is an artificially low salary, then paying £12k isn't going to be any less artificial. Therefore, I'll pay the lower tax and fight it in an investigation (or rather my insurers will!)

[Wanderer]

thanks, my wife does a large part of the admin, so does have a legitimate reason to have a salary. So just to clarify its not a red flag to HMRC to only pay ourselves £7000 salary and take the rest as dividends?

Presuming you are outside IR35, you can take £7488 salary each and issue yourself and your wife 50% of the shares each so you get equal dividends. If your dividends would put you into the higher rate tax then you can just not pay them out - retain them in the company for another year when you may be back below the higher rate tax threshold.

The only thing is that you have to have a good explanation of what your wife does to earn that salary. Google "MP's expenses" to get some ideas of the useful things wives can do to support their husband's busy careers and the salaries they get paid.

It's also interesting to note that in Jones vs Garnett (the famous Arctic systems case), Mr Jones took £6,520 as salary and Mrs Jones £3,600. The judgement stated that "The latter is accepted to have been a reasonable figure for Mrs Jones's services" though there isn't any mention of what she was doing for the company.

It appears to me that HMRC's main attack on income splitting comes via IR35 these days, if they are going to get you then that's how they will do it...

[GeekyGrandad]

Hi MnF,

You can look at this in two parts;
(1) Two shareholders. Yes, no problem with you both being shareholders, and each receiving dividends in proportion to your shareholdings. There are a few things you need to be careful of to ensure your wife's shares are not seen as a 'right to income', but this arrangement is common practice and although the HMRC have a dim view of the arrangement, just ensure you play by the rules under the current legislation.

(2) Salary. If your wife has a role in the company, and actually does work for it, and the salary can be justified for the work she does, then this will be fine. If the salary arrangement is just a sham, and your wife really does nothing for your company, then the HMRC won't like it.

So, what about Arctic System Ltd win at the House of Lords when HMRC tried it on with S660A? They may not like it but there is nothing they can so about it. When you are a freelancer, you give up the cushion of employment and have to make provisions against the risks. A fact that HMRC seem not to accept.