No Tax Free Allowance to Use

[drumtochty]

Friend setting up a Ltd company at the start of the 13/14 tax year.

He is 55, retiring at the end of January 2013 with a final salary pension of circa £23k pa. His wife is still working and earns circa £25k pa staff and will keep on working for a good few years.

So neither of them has any tax free allowance to use up and will be directors of this consultancy.

They could both pay themselves up to the secondary threshold to avoid paying NI on this Ltd Company salary but as they will both be paying 20% paye and probably 40% on dividends is there any reason to do this rather than just do dividends. They both have more than a living wage from outwith the company.

Would HMRC prefer to see some wages going through or are they just as happy with dividends.

Turnover of company will be £30k o£40k to keep him out of the way of the buses working in the oil and gas industry. I reckon the turnover could easily reach £70k.

[northernladuk]

There are some comments halfway down the responses of this page that say it is possible...

http://www.accountingweb.co.uk/anyan...-and-no-salary

I see no problem in this set up. I have many clients in this situation and indeed my own company too. Due to other earnings there is no benefit to paying a salary in these cases.

I would question how 'savvy' this firm you keep referring to is if they are recommending clients pay additional tax and NIC by increasing their salary above the personal allowance.

It's an old thread so maybe not the best example. We have quite a few questions about people contracting after breaking the threshold from the previous work in permie land and the answer then is to not pay a salary so guess it is same thing.

I dunno what I started this reply. An accountant will just come on and say 'It's ok' or something as simple as that.

[eek]

Friend setting up a Ltd company at the start of the 13/14 tax year.

He is 55, retiring at the end of January 2013 with a final salary pension of circa £23k pa. His wife is still working and earns circa £25k pa staff and will keep on working for a good few years.

So neither of them has any tax free allowance to use up and will be directors of this consultancy.

They could both pay themselves up to the secondary threshold to avoid paying NI on this Ltd Company salary but as they will both be paying 20% paye and probably 40% on dividends is there any reason to do this rather than just do dividends. They both have more than a living wage from outwith the company.

Would HMRC prefer to see some wages going through or are they just as happy with dividends.

Turnover of company will be £30k o£40k to keep him out of the way of the buses working in the oil and gas industry. I reckon the turnover could easily reach £70k.

Well the two options would be to maximise dividends up to the 40% limit for both him and his wife
or to throw it directly into a pension as that would avoid paying corporation tax.

[Greg@CapitalCity]

They could both pay themselves up to the secondary threshold to avoid paying NI on this Ltd Company salary but as they will both be paying 20% paye and probably 40% on dividends is there any reason to do this rather than just do dividends. They both have more than a living wage from outwith the company.

Would HMRC prefer to see some wages going through or are they just as happy with dividends.

With the personal allowance already being used up, there is no tax advantage to be gained by paying a salary through the ltd company. If the couple wanted to reduce their compliance work, I would suggest not registering the company for PAYE, and just paying dividends. There is no requirement for a director to be paid a salary.

[Jessica@WhiteFieldTax]

A no salary scenario wouldn't worry me; the over arching issue is best overall fiscal result for client.

I've never seen HMRC raise anything concerning dividends only and no salary from a company.

However the client needs to take personalised advice from their accountant, and some accountants may have differing comfort levels.

[IR35 Avoider]

I will speak as if there is one worker, but ideas can easily be extrapolated if they are both actually bringing in fees.

Surely he might as well take up to the NI-free allowance as salary as that will immunise that amount of income against IR35. (Assuming he is not 100% sure not caught, which I doubt anyone ever is.)

Also he might be able to put up to £50,000 (or more if he can carry forward unused allowances) into a pension which he can immediately start drawing, so £12,500 tax free lump sum plus annual income for life from remaining £37500. (Anything put into pension is also IR35-proof.)

[Contreras]

They could both pay themselves up to the secondary threshold to avoid paying NI on this Ltd Company salary

You only need to pay up to Lower Earnings Limit (£5668 for 2013-14) to get your NI stamp. This can make sense if you have other income using up your personal allowance for income tax.

Would HMRC prefer to see some wages going through or are they just as happy with dividends.

HMRC would prefer you pay the whole lot as salary but that's their problem not yours.

Turnover of company will be £30k to £40k to keep him out of the way of the buses working in the oil and gas industry. I reckon the turnover could easily reach £70k.

Consider paying salary & dividends to take total income up to the threshold for higher rate income tax (or more if you need it) and dump the excess profits from the company into a SIPP as company pension contribution (up to £50k per year) then take out 25% lump sum tax free and the remainder as draw down. But do get advice from an accountant that understands these things.

[BolshieBastard]

A no salary scenario wouldn't worry me; the over arching issue is best overall fiscal result for client.

I've never seen HMRC raise anything concerning dividends only and no salary from a company.

However the client needs to take personalised advice from their accountant, and some accountants may have differing comfort levels.

Interesting. So hmrc dont appear to have a problem with no salary and dividends yet seem to have issues with small salary and dividends!

[Nixon Williams]

Whilst in this situation there is no advantage in paying a salary, neither is there a disadvantage - so a small salary could still be paid.

Your accountant should be able to arrange this as part of their standard service.

[northernladuk]

Interesting. So hmrc dont appear to have a problem with no salary and dividends yet seem to have issues with small salary and dividends!

I don't think it is because they have a problem, it's because they don't have a focus on it. In their eyes small salary big divs is being abused on a large scale so worth the time and effort to try implement IR35 and all the investigations.

I would think no salary no divs is rarely used as it is advantageous to pay a salary and use the tax break so only needed in very particular circumstances. If this method was being abused to the same scale as low sal/high div I am sure they would be over it like a rash. The whole concept of a company making money and not paying salaries just seems wrong, it's just pretty rare and not worth their time... and I would expect a legal minefield just as IR35 is as well.