Limited company - dividends and salaries

jenpage

Apologies if this has been asked before. I have used the search option.
Perhaps I am being thick but after extensive searching of google, reading of the Inland Revenue site (that was an exciting evening!) and doing all the courses going at my local Business Link centre, I am still a bit confused.
My partner and I are setting up a limited company.
He will work for it as his main income. I will continue with my day job and just provide support with accounting and admin. He is intending to draw a salary from the business.
I understand that he will pay income tax and NI on his salary.
At the end of year, we will also pay 19% corporation tax on the profits (note my optimism that there will be some!). So far so good.
With the money left over, I'm presuming that we either leave it in the business for a rainy day or to buy more equipment or that we can take it out as dividends or take some out and leave some in.
Do we pay income tax again on any dividends we take? If so, doesn't that mean that we are paying tax twice as we'll have already lost 19% of our profit to the Inland Revenue as corporation tax and then will lose at least another 22% in Income Tax.
Finally, if we each own 50% of the business, does that mean that we have to take equal dividends? I am just thinking that if I ever give up work say to have a baby, I will be in a lower tax bracket so might want to take more dividends to take advantage of that than my salaried partner!
Thanks for any advice!

ukbill69

Dividends are paid to directors/share holders of the company, you will pay 19% tax to IR, you add this to your tax return form, your accountant can sort this for you. Dividends are a way for directors to get bonuses and pay tax without paying high national insurance rates. You prob wont need to pay corp tax as that only for companies with high gains, wouldnt worry unless you make loads of cash and doesnt sound like you are if you still going to work for another company as your full time job. Your business partner can work on a wage of £5000 pa (£100 per week) and not pay tax or ni, well very small and then he could pay rest in dividends if he wanted.

richt71

You've got 2 different things here. Your partner would pay NI and income tax (up to 40% as per normal)on the salary he takes monthly. However as a ltd company you're right that he's entitled to take dividends from profits which are taxed at a flat rate of 19% (corporation tax). You do not pay personal tax on dividends just corporation tax.Best consulting an accountant as the tax office will require your partner to be paid a salary before taking dividends. My accountant advised me it was best to take up to £9k a month in salary then take the rest in dividends but obviously that is based on my business plan so may be different for you.

jenpage

Thanks for that Richt71!
So if the business is in profit, and I'm not getting a salary, do you mean that I can't take any dividends? If so, how do I, as a non-salaried director, benefit from the work I do for the company or from my involvement and investment in it?

Pennywise

I cannot really agree fully with the answers to this post. Some bits are OK but some are not.

Firstly, as a company director, you DON'T HAVE to be paid a wage. Minimum wage doesn't apply to directors as long as they don't have a contract of employment.

Secondly, unless IR35 applies (i.e. HMRC consider you a disguised employee), there is little point in paying a salary of more than circa £5,000 p.a. On a salary of this level, you'll be under the threshold for paying either employees or employers NIC. If you both have other income from employment (as indicated in the OP) then any wages will be taxed - at 22% assuming your total income is within the basic rate tax band (i.e. under say £35-£40k pa). If you do both have other wages using your personal and lower rate tax band, it is probably better not to pay any wages at all - you'd save 19% corporation tax on the wages, but pay 22% income tax, so a net loss of 3% in tax!

Thirdly, ALL limited companies pay tax on their profits, however small. There is no lower limit. If the company makes profit of even just £1, you have corporation tax of 19% being 19p!

Fourthly, the payment of a dividend does not affect the company's corporation tax bill. Whether you pay a dividend or not, or a higher or lower dividend, the corporation tax will stay the same.

Fifthly, as an individual, any dividends you receive "come with" a tax credit attached. If your total income for the year (including gross dividends - amount received plus tax credit) comes within the basic rate band (i.e. say £35k to £40k), then you don't personally pay any more. Only if some or all of the dividends take your total income over the higher rate threshold, do you pay higher rate tax of 25% of the net dividend exceeding the higher rate threshold.

So, if you are a basic rate taxpayer, you don't pay any more tax if you take dividends. to the total tax paid is just 19%. If you are a higher rate taxpayer, you'll pay another 25% on the dividends in the HR band.

So, there is NO duplication of taxes.

As long as you both work for the company, you can both draw whatever salary you agree between you (HMRC have NO power to argue or disallow whatever you agree unless IR35 applies). Salary - called directors fees - can be paid regardless of shareholdings - directors fees are paid to directors - whether they are shareholders or not and regardless of their shareholding proportions. Dividends are paid to shareholders, again regardless of whether the shareholders are directors. These are two completely different types of "person" and "payment" and the distinction, often misunderstood, is vitally important.

As for shareholdings, normally if you have the same class of shares, you both have to take the same. BUT, you can issue an additional class of shares called say A and B shares, you have the A and your partner has the B. You can then vote a dividend only to the A shares or the B shares, or a different amount on each. NB this is only without HMRC challenge if you both work for the company and make roughly equal contributions to it. If one of you puts more in (in terms of investment, working hours, skills, etc), then you may be challenged under the settlements legislation (currently going through the courts).

I would strongly recommend getting an accountant involved right from the start. There are loads of things that can be challenged if the paperwork and procedures aren't followed. To make a limited company work for you from a tax saving perspective, you need to have all the i's dotted and t's crossed. HMRC don't like people using limited companies to reduce their tax but have remarkably little ammunition to challenge (as there are no laws stopping the practices) so have to resort to challenging poor paperwork and procedure errors to get their pound of flesh. Do it right, and they can't touch you.

greyteam1959

I agree with what Pennywise says......but I would stress the point about getting a good accountant....ask around because what you will pay in a year for an accountant assuming your books are computerised will be say £1500 per year for a small business as you describe. This will be extremely well worth it.
We have used this system over the last 20 years and even now this way is according to our accountant is about 24% to our advantage.
Only point I would add is to make sure that if your partner takes a minimal salary always pay enough so that they pay even £1 per week National Insurance cos if you dont you will affect your state pension rights

richt71

Pennywise wrote:

I cannot really agree fully with the answers to this post. Some bits are OK but some are not.

Firstly, as a company director, you DON'T HAVE to be paid a wage. Minimum wage doesn't apply to directors as long as they don't have a contract of employment.

Secondly, unless IR35 applies (i.e. HMRC consider you a disguised employee), there is little point in paying a salary of more than circa £5,000 p.a. On a salary of this level, you'll be under the threshold for paying either employees or employers NIC. If you both have other income from employment (as indicated in the OP) then any wages will be taxed - at 22% assuming your total income is within the basic rate tax band (i.e. under say £35-£40k pa). If you do both have other wages using your personal and lower rate tax band, it is probably better not to pay any wages at all - you'd save 19% corporation tax on the wages, but pay 22% income tax, so a net loss of 3% in tax!

Thirdly, ALL limited companies pay tax on their profits, however small. There is no lower limit. If the company makes profit of even just £1, you have corporation tax of 19% being 19p!

Fourthly, the payment of a dividend does not affect the company's corporation tax bill. Whether you pay a dividend or not, or a higher or lower dividend, the corporation tax will stay the same.

Fifthly, as an individual, any dividends you receive "come with" a tax credit attached. If your total income for the year (including gross dividends - amount received plus tax credit) comes within the basic rate band (i.e. say £35k to £40k), then you don't personally pay any more. Only if some or all of the dividends take your total income over the higher rate threshold, do you pay higher rate tax of 25% of the net dividend exceeding the higher rate threshold.

So, if you are a basic rate taxpayer, you don't pay any more tax if you take dividends. to the total tax paid is just 19%. If you are a higher rate taxpayer, you'll pay another 25% on the dividends in the HR band.

So, there is NO duplication of taxes.

As long as you both work for the company, you can both draw whatever salary you agree between you (HMRC have NO power to argue or disallow whatever you agree unless IR35 applies). Salary - called directors fees - can be paid regardless of shareholdings - directors fees are paid to directors - whether they are shareholders or not and regardless of their shareholding proportions. Dividends are paid to shareholders, again regardless of whether the shareholders are directors. These are two completely different types of "person" and "payment" and the distinction, often misunderstood, is vitally important.

As for shareholdings, normally if you have the same class of shares, you both have to take the same. BUT, you can issue an additional class of shares called say A and B shares, you have the A and your partner has the B. You can then vote a dividend only to the A shares or the B shares, or a different amount on each. NB this is only without HMRC challenge if you both work for the company and make roughly equal contributions to it. If one of you puts more in (in terms of investment, working hours, skills, etc), then you may be challenged under the settlements legislation (currently going through the courts).

I would strongly recommend getting an accountant involved right from the start. There are loads of things that can be challenged if the paperwork and procedures aren't followed. To make a limited company work for you from a tax saving perspective, you need to have all the i's dotted and t's crossed. HMRC don't like people using limited companies to reduce their tax but have remarkably little ammunition to challenge (as there are no laws stopping the practices) so have to resort to challenging poor paperwork and procedure errors to get their pound of flesh. Do it right, and they can't touch you.

Interesting thanks pennywise. You're why I employ a good accountant as facts and figures do my head in! :T

Slinky

mervyn11 wrote:

I agree with what Pennywise says......but I would stress the point about getting a good accountant....ask around because what you will pay in a year for an accountant assuming your books are computerised will be say £1500 per year for a small business as you describe. This will be extremely well worth it.
We have used this system over the last 20 years and even now this way is according to our accountant is about 24% to our advantage.
Only point I would add is to make sure that if your partner takes a minimal salary always pay enough so that they pay even £1 per week National Insurance cos if you dont you will affect your state pension rights

My accountant advised me that ANY NI payment at all across the year will count as a contributory year as far as state pension rights are concerned. I took £5K salary in YE 2006 and paid just £24.99 as an NI contribution right at the end of the year.