Advice on remuneration and tax for partners in a small Ltd company

Good Morning,

I’m hoping to get some advice on the best setup for accounting and remuneration for a Ltd company that I am a partner in. I’m not expert in accounts so any advice in layman’s terms would be greatly appreciated!

Background

  • The company is split 3 ways between myself and 2 others each having a 3rd of the shares.
  • One partner is a director in another company, which is unrelated to the industry our joint venture is in.
  • One partner is self-employed as a consultant in the same industry
  • I also am self-employed as a consultant in the same industry
  • My business partners are also a couple (if this has any bearing)
  • My business partners and I each have our own existing clients still separate from our Ltd company but all new clients from the date the company was formed come under the new company.
  • I have an existing agreement that predates the formation of the new company. This is for a client of my business partner. Basically, I do some work for one of their clients and then invoice my business partner monthly, this makes up a fair portion of my monthly income.


Proposed solution

  • My business partners have now proposed that we move all our clients, everything to our new company
  • Setup PAYE and each take a monthly wage and then splits any profits via dividends

Issues/queries

The current workload is probably split between the three of us as follows; 45% (me), 40% (colleague 1), 15% (colleague 2). I would want any remuneration to reflect this workload, though there will be some negotiation on roles to ensure the current workload could be more evenly distributed.

I have a friend who is a trainee accountant and he has advised me that in my situation and for tax purposes it would work best for me financially to take out dividends instead of a wage. He said it’s possible to set up different types of shares that doesn’t affect control/ownership of the businesses but does allow individuals to take out different dividend amounts, though he wasn’t an expert in this area. Can someone tell me if this would work or is there a limit on the dividends you can take in this way before it's not economically viable.?

Any help or advice would be much appreciated, if you need any other information please let me know!

Kind regards

Trevor

 


Comments

  • Sandtree
    Sandtree Posts: 10,628 Forumite
    First Anniversary First Post Name Dropper
    Firstly, why are you not all directors of the company? As you are not you legally must hold Employers Liability Insurance and you must offer a Pension Scheme even if the two non-directors don't take it (offering one means having a facility set up not just notionally offering one from what I was told by my accountants).

    Secondly, you need to get proper advice from an accountant on the matter and understand the risks of any structure you are considering. I know when I was considering shares in my micro-business our accountant recommended against issuing different classes of shares as it could peak HMRC's interests but then for what I do IR35 is a potential risk and so you simply want to keep off HMRCs radar. If that is true or not I am not knowledgeable enough to say but there is little point paying for an accountants advice and then totally ignoring it or saying its wrong.
  • tacpot12
    tacpot12 Posts: 7,922 Forumite
    First Anniversary Name Dropper First Post
    edited 26 August 2020 at 11:30AM
    I would recommend that your and your co-directors record the time you spend working in the business and for which clients using a common app so you can all see how much time has been spent. I would suggest that you pay out 70% of the expected profit as salary based on the number of hours worked per month. You will pay tax and NI on this salary. The remaining profit, if any, should be divided equally between shareholders.

    This is not the most tax efficient arrangement, but it is  an arrangement that is easy, fair and will not have HMRC breathing down your necks.  Paying money out to a pension is also tax efficient, so all the directors should take advantage of this. The pension payments should be based on the hours works and paid from salary to get the tax relief. 

    One final point, it would be better not to call them "partners" as your business is a limited company and not a partnership. 
    The comments I post are my personal opinion. While I try to check everything is correct before posting, I can and do make mistakes, so always try to check official information sources before relying on my posts.
  • Sandtree said:
    Firstly, why are you not all directors of the company? As you are not you legally must hold Employers Liability Insurance and you must offer a Pension Scheme even if the two non-directors don't take it (offering one means having a facility set up not just notionally offering one from what I was told by my accountants).

    Secondly, you need to get proper advice from an accountant on the matter and understand the risks of any structure you are considering. I know when I was considering shares in my micro-business our accountant recommended against issuing different classes of shares as it could peak HMRC's interests but then for what I do IR35 is a potential risk and so you simply want to keep off HMRCs radar. If that is true or not I am not knowledgeable enough to say but there is little point paying for an accountants advice and then totally ignoring it or saying its wrong.
    Hi Sandtree,

    Thanks for the quick response. I didn't make it clear but we are all directors in the ltd company, if that helps at all. Thanks for the advice on the other points
  • oldbikebloke
    oldbikebloke Posts: 1,096 Forumite
    First Post Name Dropper
    edited 26 August 2020 at 1:47PM
    your trainee accountant is basically correct
    yes a company can have different classes of shares (referred to as "Alphabet shares") where each class (eg A, B, C etc) has different (including, if you want, no) entitlement to dividends 

    if you personally have no other source of income than what comes from the company, then the most personal tax efficient method is to take a "director's minimum" salary and the rest as dividends. For example, if you retain a reasonable (ie >£12,500) gross income in 20/21 from work done outside the company, then even minimum salary from the company is pointless, as your personal tax position would be best taking all dividends and no salary at all. 

    Of course that only works where the company makes enough profits to pay dividends in the first place, and therefore if the company goes through a lean time, your income will drop. if the company is paying low salaries then it has low costs, higher profits and so will pay more corporation tax.

    The alternative is a "high" salary and residual dividends. That means the salary is a cost for the company, so it pays less corporation tax, but has lower profits from which to pay dividends.

    As you can see above, it is vital to consider the total size of the pot when it is to be divided up between owner managers, as each person's personal circumstances could make the solution for them different to that for the others. No clear cut answer may therefore appear, and you'll need to reach a majority decision. As this is really the most basic start point on how to structure a business, you must sit down with your accountant to crunch the numbers. Producing such illustrations is bread and butter advisory work for small business accountants (qualified, not trainee)

  • your trainee accountant is basically correct
    yes a company can have different classes of shares (referred to as "Alphabet shares") where each class (eg A, B, C etc) has different (including, if you want, no) entitlement to dividends 

    if you personally have no other source of income than what comes from the company, then the most personal tax efficient method is to take a "director's minimum" salary and the rest as dividends. For example, if you retain a reasonable (ie >£12,500) gross income in 20/21 from work done outside the company, then even minimum salary from the company is pointless, as your personal tax position would be best taking all dividends and no salary at all. 

    Of course that only works where the company makes enough profits to pay dividends in the first place, and therefore if the company goes through a lean time, your income will drop. if the company is paying low salaries then it has low costs, higher profits and so will pay more corporation tax.

    The alternative is a "high" salary and residual dividends. That means the salary is a cost for the company, so it pays less corporation tax, but has lower profits from which to pay dividends.

    As you can see above, it is vital to consider the total size of the pot when it is to be divided up between owner managers, as each person's personal circumstances could make the solution for them different to that for the others. No clear cut answer may therefore appear, and you'll need to reach a majority decision. As this is really the most basic start point on how to structure a business, you must sit down with your accountant to crunch the numbers. Producing such illustrations is bread and butter advisory work for small business accountants (qualified, not trainee)


    Thanks for this info! So supposing I was to move everything over so I have no other income outside the business, just to make things more 'simple', what would a "director's minimum" be?

    Also you're saying if I go above the min tax income for anything outside the business it's better to just ask for dividends from the company?
  • Sandtree
    Sandtree Posts: 10,628 Forumite
    First Anniversary First Post Name Dropper
    your trainee accountant is basically correct
    yes a company can have different classes of shares (referred to as "Alphabet shares") where each class (eg A, B, C etc) has different (including, if you want, no) entitlement to dividends 

    if you personally have no other source of income than what comes from the company, then the most personal tax efficient method is to take a "director's minimum" salary and the rest as dividends. For example, if you retain a reasonable (ie >£12,500) gross income in 20/21 from work done outside the company, then even minimum salary from the company is pointless, as your personal tax position would be best taking all dividends and no salary at all. 

    Of course that only works where the company makes enough profits to pay dividends in the first place, and therefore if the company goes through a lean time, your income will drop. if the company is paying low salaries then it has low costs, higher profits and so will pay more corporation tax.

    The alternative is a "high" salary and residual dividends. That means the salary is a cost for the company, so it pays less corporation tax, but has lower profits from which to pay dividends.

    As you can see above, it is vital to consider the total size of the pot when it is to be divided up between owner managers, as each person's personal circumstances could make the solution for them different to that for the others. No clear cut answer may therefore appear, and you'll need to reach a majority decision. As this is really the most basic start point on how to structure a business, you must sit down with your accountant to crunch the numbers. Producing such illustrations is bread and butter advisory work for small business accountants (qualified, not trainee)


    Thanks for this info! So supposing I was to move everything over so I have no other income outside the business, just to make things more 'simple', what would a "director's minimum" be?

    Also you're saying if I go above the min tax income for anything outside the business it's better to just ask for dividends from the company?
    The standard is whatever the current tax free allowance is... whilst the comment about profits is true with all else being even if there is no profits to pay you dividends on a minimum salary then there is also no cash to increase salary to something higher. Clearly with lower salaries you can take the strategic decision to reinvest profits to try and grow the business and therefore take lower dividends.

    I am unclear on your last question... if its "outside the business" then the business cannot pay you dividends on it
  • oldbikebloke
    oldbikebloke Posts: 1,096 Forumite
    First Post Name Dropper
    edited 27 August 2020 at 2:03PM
    Trevstonbury_2 said:
    Thanks for this info! So supposing I was to move everything over so I have no other income outside the business, just to make things more 'simple', what would a "director's minimum" be? 
    Also you're saying if I go above the min tax income for anything outside the business it's better to just ask for dividends from the company?

    the following are not precise figures to the penny, You can get your accountant to do that for you as I don't know your personal circumstances so cannot say which is "best" for you. Also very important you appreciate dividends taken monthly could be viewed by HMRC as tax evasion on earnings that should have gone through PAYE. So quarterly dividend possible, 6 monthly or  annual = no problem. There are company secretary issues when taking dividends along with the need to have uptodate accounts records to show available profit. If HMRC investigate it is often that sort of technical stuff they pick up and use against you..

    no personal income other than from the company :

    director minimum option A - no employee NI to pay 
    director draws salary equal to the national insurance primary threshold  £9,504 per year (20/21 tax rates)
    director incurs zero employee NI and zero income tax deductions on the pay via company payroll. The money is totally (personal) tax free..
    (* note that amount is greater then the "secondary" threshold so the company may have to pay employer NI offset by the employer NI allowance - if available.  You need your own accountant to check that as there are restrictions on employers national insurance allowance which may affect the company's ability to claim it. (secondary threshold is £8,640)

    Company profit is reduced by the payroll cost leaving a net profit (after corp tax) from which the director can take as a dividend 

    director minimum - option B - small bit of employee NI to pay (but director gets a tad more cash in his personal bank each month  as salary  which is why some people prefer to lose a bit to NI, but get more cash each month in-between waiting for the dividend).
    salary drawn is equal to income tax personal allowance £12,500
    no income tax payable by director on the pay via company payroll as earnings below personal allowance.  
    Employee will incur NI deduction on difference between 9,504 and 12,500. Company will pay employers NI but as above may be able to offset that against the employment allowance - check with the company accountant for exact circumstances


    company profit is reduced by the payroll cost leaving a net profit (after corp tax) from which the director can take as a dividend 

    there is personal income from outside the company 
    if you have income other than from the company salary, then obviously you do not have all of the personal allowance remaining to enable you to pay a salary in the company equivalent to the full allowance, as some of it has been "used up" by the non company income. Obviously the maths can be played with if the external income is <£12,500 to work out what, if any residual amount can still be taken as company salary. 

    In conclusion 
    No / low salary cost in the company means company has higher profits, will pay more corp tax, and will have higher profit after tax to take as dividends. However, that does not mean your personal post income will always be higher as the total personal tax payable varies with the mix of salary (or none), external income (or none), and dividends. That is largely due to the way national insurance affects earnings but not dividends . Hence the need to use real figures for your personal circumstance when informing a decision which is "best mix"..

    PS forgot the important bit. The whole point of having earned income (via company and/ or external) is to ensure you always "earn" at least the NI threshold and therefore get full credit towards your state pension contributions and other benefit entitlements. You may think so what, but the closer you get to retirement the more you appreciate even a modest state pension. No / too low salary = no state pension = years of regret in retirement!
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