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View Full Version : The old 'dividend vs salary' question



thinkofaname
24th March 2004, 22:33
Yes, that old chesnut,

It appears a nominal salary (say, £4615 per year) is usually paid to company directors to keep them in good with state pension (meeting the minimum NI requirements).

If I have no need to want a state pension, then it seems going the 100% dividend route is most tax-effective.

Is state pension the reason why most accounting companies recommend a small salary payment for the director? I don't buy into the theory that I should at least have some salary to lessen the likelihood of an IR35 audit.

Cheers

fiddleabout
25th March 2004, 09:41
Considering the actual tax + NI costs of a minimum salary what is the problem?

Plus how would you reclaim your tax free personal allowance if you were divvi only? My bet is that it would take considerable effort and simply draw attention to you.

You really must be desperate.

My advice - stick with paying a nominal salary.

Better still - get yourself a decent accountant (http://www.************.co.uk)

antagoneyes
25th March 2004, 10:16
One of the considerations for a nominal salary has to be the minimum wage. Not sure how enforceable this is though?

thinkofaname
25th March 2004, 12:07
Cheers for the comments. All good stuff!

My tax free allowance comes off gross divi payments - no problem there, I get the full benefit of the first £4615 tax free. After that am taxed at the dividend tax rate (which is compensated for with the tax credit you get for divi's up to £29,900).

The problem is (well, its not really a problem), its more tax effective to pay myself 100% dividends, so why the need to pay the TAXMAN more than I need to by throwing in a bit of salary??

Minimum wage doesn't come into it because I am not an 'employee' of my company, but rather am being paid a small earning in my capacity as company director.

Cheers again for the comments - any and all are appreciated!

Martin Underwood
25th March 2004, 14:00
Mr Think:

" I am not an 'employee' of my company, but rather am being paid a small earning in my capacity as company director."
Not true, Mr Pink. Not only are you the company director, but you are also the person performing the role of consultant/analyst/developer (whatever).

Mr Drink, you need to think. If you pay yourself no salary at all, but claim 60K (or 100K, if your rate is good, Mr Minkcoat) in dividends, all you're doing is drawing attention to yourself. The Inland Revenue would (quite rightly) start looking a little more closely at your affairs and find some reason to throw the book at you, Mr Clink.

So, follow the advice of most accountants, and pay yourself a basic minimum salary. Stop trying to save every single penny of tax. Sometimes, it aint worth it.

thinkofaname
25th March 2004, 16:14
Great reply...and good use of names!

So it sounds like there is no reason to pay a salary other than to keep under the IRD radar of suspicious dividend paying activity.

I don't buy the theory, but monkey does as monkey reads from every other posting on this thread.

If I am an employee, then National Minimum Wage applies. It doesn't, so you're wrong - but sounded convincing.

www 1staccountancy biz
25th March 2004, 16:24
:x

fiddleabout
25th March 2004, 16:57
Care to expand on that please Darren :)

tim123
25th March 2004, 17:11
Am I the only poerson here who thinks that you are wrong.

I though that the system was that you had a basic rate tax credit for your divided payment but *cannot* reclam this if you do not use it.

What did I not understand?

tim

www 1staccountancy biz
25th March 2004, 17:23
Care to expand on that please Darren

Fiddle....I agree with your initial post & that of Martin, best to pay a salary through the company rather than extracting funds purely using the dividend route...asking for trouble.

thinkofaname
25th March 2004, 17:59
Cheers,

Thats dead right, you can't claim the dividend tax credit if you don't use it.

By my best guess, any divi/salary combo of less than about £35k per year is best paid with a nominal salary (say £4,615) to take advantage of the dividend tax credit.

Anything over that, the most tax effective route is to go 100% divi (the higher tax rate of 32.5% on divvis over £29,900 mops up any tax credits left over).

As for being worried about an tax investigation for paying 100% dividends, well....provided I'm outside IR35, where exactly is the problem?

Nice answer tim123,