Using different share classes to pay employees in dividends

[minstrel]

One of the most efficient ways of paying yourself through a limited company is with a small salary and high dividends. This is because paying dividends reduces the National Insurance contributions that need to be made for PAYE salary.

When a company issues shares, all shares within the same class must receive the same dividends. However, if a company sets up different classes of share then the dividends only need to equal within the share class.

My question is: what is there to prevent companies setting up a different share class for each of their employees and paying all employees a 'salary' via dividends to avoid National Insurance?

If the principle works for a one man contractor outfit, why can it not be extended to a small company with 5 directors/employees or to a big company with 10,000 employees?

Any ideas? I'm sure there must be a reason why this doesn't work.

[Nixon Williams]

This almost describes how the Managed Service Companies operated before they were stopped in 2007.

This is no longer an option.

[minstrel]

Good point Alan, but what if the company doesn't fall into the MSC legislation.

I didn't make it clear in my original post, but my question is not specifically related to the contractor scenario.

Say 5 people got together to work on a plan B. They could set up an ordinary Ltd company, each being a Director and issue 1 ordinary share each.

However, this means they each need to share equally in the profits. If one Director puts in twice as much work then that is a bit unfair that he doesn't get more of the profit.

You could get around it be issuing more shares to the Director that puts in more effort, but that would involve transferring shares around if different Directors contribute different amounts throughout the life of the company.

If each of the Directors were to receive a different class of share, then there would be no need to mess around with share transfers and the Board could just decide how much dividends to issue to each class of share based on the respective Directors contribution to the business.

Does the MSC legislation only cover Service companies? I thought it did. Imagine the Plan B was 5 guys looking to set up a Pizza restaurant and looking for a fair way to distribute profits. Would MSC legislation apply.

The standard questions I've seen on MSC would indicate that this sort of set up would not be covered by MSC e.g. Are you a director? Yes. Are you signatory to Bank Account? Yes. Do you control finances? Yes. Does Service Provider offer only accountancy and legal? Yes.

[Limited]

Does anyone else have thoughts / comments on this question please?

My accountant thinks it would be ok in the case of our company (2 fee-earning shareholder / directors).

I'm not convinced and think it might be easier for us to take equal dividends and just pay a salary bonus if necessary to cover any differences, taking the hit on NIC.

Anyone done anything similar?

thanks

[Accountax Consulting]

Employment Related Securites

It is possible to do but you need to consider if you fall foul of the employment related securites legislation. If so the money will be taxed as employment income; including NI

[Limited]

Thanks for your reply. Is that the same issue as the MSC legislation in post 2 or something else I need to look into?

[Accountax Consulting]

No it is not the same as MSC legislation.

ERS legislation was designed to catch the situation where bonuses were paid as dividends to avoid tax and national insurance. It can be done but you will need good commercial reasons for doing so. Ask your accountant if he has considered this.

[Limited]

Thanks AC. I will discuss with my accountant.
I would be interested to hear of other experiences / ideas of how to arrange the following...

2 consultants set up new company and originally subcontracted work back to our own ltd companies.
Various reasons (costs, admin overhead, type of projects, IP and reputation we've developed etc) it seems to make sense to just work through the OurCo and close / make dormant our own companies.
Quite happy with the 50/50 split in divs at the moment, but would like to keep flexibility to change that later (eg if we agree that one has extended time off etc). Perhaps we would be better worrying about that when/if it happens and just keep it simple for now.

thanks for any help

[kryten22uk]

My accountant set my Ltd up with a different share for my wife than me. This meant that the proportion of dividends that wife got could vary from year to year. I understood this to be relatively commonplace for man-wife setup.