Why are self employed directors not eligible for financial support? Please explain

LilElvis

fenwick458 said:

LilElvis said:

Yes you have benefited by this arrangement - to the tune of several thousand pounds per year. For decades it has worked entirely in the favour of sole directors - this is the "once in a lifetime" event where it doesn't. 

I'm not sure theres as a big of a difference as everyone thinks, there used to be, but a dividend tax was brought in about 4-5 years ago.  If I'm reading the OP correctly they say "small salary & dividends equaling 25k", in no way will that save several thousands of pounds per year.
comparing the 2 side by side, (numbers might not be spot on to make the maths easier...)
both get £12500 tax free, so that leaves £12500
salary way: 20% income tax plus 11% NI £3875 to pay
dividends way: 19% corporation tax and 7.5% dividend tax £3312.50
so thats a difference of £562.50... 
It's hardly like we are all tax evading multimillionaires with offshore accounts. Only reason I have the LTD company still is because I'd like to keep my personal assets separate from the business so if something were to go wrong on a job then I have a bit of protection. it's clearly not to save loads on tax because I don't, the ltd co needs an accountant which costs £1000 per year

It's too late for me to check your calculations but I know you're adrift - for a start you employees NIC is paid at 12% and you missed employers NIC at 13.8%.

fenwick458

well for a one person LTD company the Employer NIC doesn't matter because you get £3000 allowance per year,
and OK employees NIC is 12%, bringing the total paid with the salary method to £4000, so the difference could be £687.50

zagfles

The scheme supports earned income, ie wages, self employed profit etc, not unearned income like dividends. Dividends for a company you work for are no different to an EasyJet employee who owns shares in EasyJet. Dividends from those shares are not earned income. 

If your accountant has suggested you pay yourself an artifically low wage and take dividends, ie effectively pretending earned income is unearned, suggest you ask him for a bailout. You don't have to take variable income in the form of dividends, you could take them as a bonus etc which would count as earned income. Take it up with your accountant.

Jeremy535897

zagfles said:

The scheme supports earned income, ie wages, self employed profit etc, not unearned income like dividends. Dividends for a company you work for are no different to an EasyJet employee who owns shares in EasyJet. Dividends from those shares are not earned income. 

If your accountant has suggested you pay yourself an artifically low wage and take dividends, ie effectively pretending earned income is unearned, suggest you ask him for a bailout. You don't have to take variable income in the form of dividends, you could take them as a bonus etc which would count as earned income. Take it up with your accountant.

If Governments encourage sole company shareholder directors to take dividends rather than salary, because their tax bill is legitimately reduced, it is hardly fair to penalise them now. The concept of an artificially low wage in a sole director company is meaningless. All EasyJet's value ultimately derives from trading profits apart from original capital raised. Accountants have to advise sole director shareholders of the availability of this sort of legitimate tax planning or they would be failing in their responsibilities to their clients. What do you suggest OP raises with his accountant? "Please tell me why you recommended this course of action that legitimately saved me money over the past ten years, when you should have foreseen that the country would be struck down by a pandemic and the rules for a grant would be introduced that would make me worse off?" perhaps?

mobilejo

fenwick458 said:

well for a one person LTD company the Employer NIC doesn't matter because you get £3000 allowance per year,
and OK employees NIC is 12%, bringing the total paid with the salary method to £4000, so the difference could be £687.50

Sole director companies with no employees can't claim the Employer's allowance.

But in general I see your point. There are not huge tax savings at that level, they don't become significant until you make more than the £50k earnings cap that applies to the self employed, so they should have applied the scheme to directors whose total salary + dividends is less than £50k. Maybe give them 70 - 75% instead of 80% to account for the slightly lower tax bills they have paid if that makes things a bit more fair. 

Accountants have been dishing out the same advice for years because its their job to advise on the most efficient structure for tax purposes, all other things considered. The problem was that this situation was never considered! That isn't the accountants shortsightedness, its the Government literally ripping up decades of rules on who is entitled to state support and re-writing them in an afternoon - policy has never been that a director who pays himself all salary with NICs will get a monthly stipend from HMRC if his business can't trade, so why would accountants ever advise anyone to structure their affairs with that aim? Using low salary + dividends, I save around £6k per year at current rates. Over the years I must have saved around £45k doing that. In exchange, I personally have to accept that I would have no right to complain about the lack of help available to me now. 

LilElvis

fenwick458 said:

well for a one person LTD company the Employer NIC doesn't matter because you get £3000 allowance per year,
and OK employees NIC is 12%, bringing the total paid with the salary method to £4000, so the difference could be £687.50

Of course Employers NIC matters - you have £X in the bank to pay out and this would be part of the cost if the money was distributed via PAYE rather than as a dividend.

Jeremy535897

LilElvis said:

fenwick458 said:

well for a one person LTD company the Employer NIC doesn't matter because you get £3000 allowance per year,
and OK employees NIC is 12%, bringing the total paid with the salary method to £4000, so the difference could be £687.50

Of course Employers NIC matters - you have £X in the bank to pay out and this would be part of the cost if the money was distributed via PAYE rather than as a dividend.

Not if your total employer's NIC is below £3,000 for 2019/20. See
https://www.crunch.co.uk/knowledge/employment/employment-allowance-explained/

zagfles

Jeremy535897 said:

zagfles said:

The scheme supports earned income, ie wages, self employed profit etc, not unearned income like dividends. Dividends for a company you work for are no different to an EasyJet employee who owns shares in EasyJet. Dividends from those shares are not earned income. 

If your accountant has suggested you pay yourself an artifically low wage and take dividends, ie effectively pretending earned income is unearned, suggest you ask him for a bailout. You don't have to take variable income in the form of dividends, you could take them as a bonus etc which would count as earned income. Take it up with your accountant.

If Governments encourage sole company shareholder directors to take dividends rather than salary, because their tax bill is legitimately reduced, it is hardly fair to penalise them now. The concept of an artificially low wage in a sole director company is meaningless. All EasyJet's value ultimately derives from trading profits apart from original capital raised. Accountants have to advise sole director shareholders of the availability of this sort of legitimate tax planning or they would be failing in their responsibilities to their clients. What do you suggest OP raises with his accountant? "Please tell me why you recommended this course of action that legitimately saved me money over the past ten years, when you should have foreseen that the country would be struck down by a pandemic and the rules for a grant would be introduced that would make me worse off?" perhaps?

Well it makes much more sense than saying to the government "please now treat that the income I pretended was unearned in order to avoid paying National Insurance as earned income so I can have my cake and eat it".

Dividends are unearned income, and are not, and should not be covered by this scheme. Even if the dividends are from a company you work for. If someone has saved several thousand in NI over the years through this type of creative accounting then they should use the money they saved to bail themselves out. Instead of effectively trying to claiming on an insurance they didn't pay the premiums for.

Jeremy535897

We will have to agree to disagree.

LilElvis

Jeremy535897 said:

zagfles said:

The scheme supports earned income, ie wages, self employed profit etc, not unearned income like dividends. Dividends for a company you work for are no different to an EasyJet employee who owns shares in EasyJet. Dividends from those shares are not earned income. 

If your accountant has suggested you pay yourself an artifically low wage and take dividends, ie effectively pretending earned income is unearned, suggest you ask him for a bailout. You don't have to take variable income in the form of dividends, you could take them as a bonus etc which would count as earned income. Take it up with your accountant.

If Governments encourage sole company shareholder directors to take dividends rather than salary, because their tax bill is legitimately reduced, it is hardly fair to penalise them now. The concept of an artificially low wage in a sole director company is meaningless. All EasyJet's value ultimately derives from trading profits apart from original capital raised. Accountants have to advise sole director shareholders of the availability of this sort of legitimate tax planning or they would be failing in their responsibilities to their clients. What do you suggest OP raises with his accountant? "Please tell me why you recommended this course of action that legitimately saved me money over the past ten years, when you should have foreseen that the country would be struck down by a pandemic and the rules for a grant would be introduced that would make me worse off?" perhaps?

Is it any less fair than other changes in legislation in the past decade? Those who already had children but earned over £60k suddenly having their child benefit removed - over £1,000 PA if you have one child? High earners having their tax free personal allowance reduced to zero - an additional £5,000 in tax per year? These changes are permanent as opposed to the affect of a one-off event. Perhaps they could/ should have included salary plus dividends up to the PAYE employees limit of £2,500 per month - nothing at the moment is set in stone.