Best way as a director to pay yourself...

brooky_agb

Hi Folks,

I'm the singe share holder of a company that turns over £300k - £350k per year. There are no full time staff aside from a couple of contractors who are as good as full time.

Right now I paymyself to the tax threshold of around £6k per year and they the rest in dividends. I don't have a pension at all!! Bad I know.

Is that the best way?

Would it be better to pay yourself to the higher rate threshold then dividends there after?

I'm not very trusting of financial advisors who just try and sell you stuff you don't need for their commission.

Wondes is anyone here is in the same or similar situation.

schneckster

The first question that springs to mind is:

What does your accountant say? You have got one, haven't you? I doubt there are many limited companies with £300k+ turnover a year without an accountant.

Also, £6k seems low. Full time on min wage (£5.80) is nearer £11k over 48 weeks. HMRC take a dim view of paying yourself the tax allowance and then a far bigger amount in dividends. They see it pretty much as tax evasion, especially if you're getting a decent amount of that £300k+ turnover!

You may want to avoid financial advisors, but it sounds like you need an urgent chat with an accountant, who would probably help your business in a lot of ways as well as steer you clear of trouble with HMRC.

Good luck,

Schneckster

Mahmood_Reza

Depends on firstly if the IR35 (personal service company) rules affect you.　 If they do then you have limited flexibility, let's assume that it　does not affect you.
Consider for example　if (a) you want to personally borrow funds, now or in the future - if so, most lenders do not consider dividends as relevant income; (b) tax, if you pay dividends then they do not attract NIC but are not classsified as expenses for the company (thus you efefctively pay Corp Tax at 21%); (c) level of personal income required and drawn out - if approx pa < £44,000 then no further tax to pay.
I would have thought that your current accountant is in a better poistion to advise, we normally like to consider initially short and medium term objectives

Pennywise

Your current setup is fine - absolutely nothing wrong with paying a small salary (£5700 is best) and then anything else as dividends. HMRC may not like it, but as long as the dividend paperwork is right, they can do absolutely nothing about it. There is NO legal obligation to pay a higher wage unless you are caught by IR35. Paying a higher wage just costs more because of both eers and ees NIC and is pointless. If an HMRC tax inspector ever argues re the £5700 wage, just ask them where, in law, it says you have to be paid a market salary or indeed anything more at all - they will soon go away and bully some other poor soul!

Bean_Counter

brooky_agb wrote: »

There are no full time staff aside from a couple of contractors who are as good as full time.

Should the contractors not be PAYE if they are as good as full time? Have a look at this HMRC link. I would imagine that if you were ever inspected then HMRC would be as interested if not more in this arrangement than your remuneration.

HappyMJ

Agreed with Bean Counter paying yourself small salary £5,700 is fine especially with the contractors who could do your work for you if you were incapacitated for a few days. That's one of the tests. But, make sure you pay the contractors PAYE or make sure that they are genuine contractors. Only an accountant can answer correctly who knows your circumstances and with your turnover I'd say it's worth it.

heretolearn_2

You need an accountant who is good at tax-planning if you want to start taking more than about 50k out in total. If more than 100k a year then there are some serious tax schemes that would be well worth doing. If you are in this sort of profit/income level then start asking your accountant some questions. If they don't know the answers, find a better accountant.

fguk

(a) you want to personally borrow funds, now or in the future - if so, most lenders do not consider dividends as relevant income

Not strictly true, whilst it is obviously much simpler to present pay slips representing income, any decent lender will take into account the full picture regarding earnings (including dividends, retained profit etc).

stevem76

An interestsing thread that has answered many questions for me - thanks.

I am just about to start a small, part-time limited company that I hope will grow and one-day replace my full-time employment. I pay income tax at the 40% rate.

I anticipate income through the business to be only a few thousand at most in the next year. Given this, can I register for PAYE but choose to draw a salary of £0 as a Director and just take a dividend as a shareholder at year end?

THanks,

Steve

Mahmood_Reza

If the company is not covered by IR35 rules (personal service company legislation) the you have a greater deal of flexibility regarding your remuneration strategy.
On a related note, what is the rationale behind setting up a PAYE scheme - are you considering taking on staff.

stevem76

Thanks Mahmood, no plan to have employees - the way I read the HMRC's guidance, I thought I had no choice but to have PAYE for Directors. If I don't have to and I can just take a dividend, that would be great.