Directors pay

System

My son is trying to start up a 'design consulting company' with 3 other young men. They plan to do the bookkeeping themselves. However they don't know how they're going to pay themselves and ask for my advice :? .

I,although being a full member since last year, am unable to advise, as I have no actual experience in this area.

Should they set up a manual payroll, and pay themselves a salary, as only just starting out and unlikely to make a profit.

Or take drawings, which would mean having to file returns and be responsible to save for there tax.

All advise welcome.

thanks

Helen :?

System

Re:Directors pay


That depends on whether they set up a Ltd Company or as a partnership.

If they trade as a Ltd Co then the money they take out will be a salary and dividends, and if they trade as a partnership then they'll take drawings.

System

Re:Directors pay

Thanks for your reply.

They are set up as Ltd company.

So you're advising they would take a salary. Could I be checky and also ask,if they are not going to employ any other people, would you recommend buying a payroll package, or is it easy enough to do a manual payroll, with advice from the inland revenue how to do it.

Thanks

Helen

System

Re:Directors pay

Hi Helen

You could do it easy enough using the HMRC employers CD rom that they provide to all new employers.

You will need to set the company up to operate PAYE and I suggest that there salary is set at the personal allowance limit (just over) and any addition money required funded by way of dividend.

Not forgetting to minute each dividend and post them correctly in the accounts and watching for the dates they are declared for entering on the SA100 return.

Have fun

Regards

Dean

System

Re:Directors pay

Thanks Dean and Jodie R

Really appreicate your help

Helen

System

Re:Directors pay

Dean

Are they not tightening up on Directors that take their pay like that now? It's not something I deal with, so it could be that I'm out of date?

Sue

System

Re:Directors pay

That's the way we advise for shareholding directors to operate in most circumstances, as it is usually the most tax efficient way. (Although, if the company is not expected to make a profit, as Helen has said, then care will need to be taken as paying dividends this way is in breach of The Companies Act.)

HMRC were not happy with this and so introduced the Non-Corporate Distribution rules to get extra corporation tax, but these have now been scrapped in favour of a straight 19% tax at the starting rate.

System

Re:Directors pay

The other potential problem is that (depending on the no of hours worked) a salary of £5000p/a will probably work out at less than minimum wage, which in theory is... *illegal*. I would think that this would only be challenged if they had proper contract of employment drawn up stipulating that they had to work x no of hours a week.

System

Re:Directors pay

One more thing to consider - you'll need to remember that if they each own an equal number of ordinary shares in the company then when a dividend is declared that the same amount is paid to each shareholder - if some are doing more work than others they can't just take a higher dividend.
I'm just pointing this out as i've got a small ltd co client - two men who've always done everything 50/50 - one is now only working 3 days a week and thought that he could just take lower dividends...

System

Re:Directors pay

Sue02 wrote:

Dean

Are they not tightening up on Directors that take their pay like that now? It's not something I deal with, so it could be that I'm out of date?

Sue

Hi Sue

Yes they are trying to clamp down on it. They are looking at paperwork to back up the salary esentially.

With signed contacts, carefully watched retained profits and directors account you shouldn't get into to much bother.

Regards

Dean

System

Re:Directors pay

There are lots of implications to running a limited company and lots of good advice handed out above.

I would add that National Minimum Wage Regulations do not apply to directors unless they have an explicit contract of employment. Something which is rare (and in fact undesirable) for a close company shareholder/director.

Keep your ear to the ground for developments on the salary/dividend tax minimisation strategy. It is perfectly legal at the moment but is something that the treasury are desperate to address. The NCD back-pedal fiasco will have sent them back to the drawing board but I am sure they will come up with something innovative.

Some EU countries apply NIC to close company dividends so that may be something to watch out for in future.