[u][b]SALARY OR DIVIDENDS[/b][/u]

System

Dear All

Is there any legal reason why a director cannot pay themselves an annual salary of £5,000 and dividends of £55,000 in the year rather than paying an annual salary of £24,000 and dividends £36,000? I have carried out a few calculations and from a “Director’s personal view point” it appear more tax efficient to go down the Dividends route – I’m just wondering if it’s the IR that don’t like this approach? I do understand that there will be company implications with the dividends route, eg increased profits, therefore possible increase CT charge. The reason why I am asking the question is because the previous accountant advised the directors’ to pay themselves the £24k salary and the rest in Dividends (£36K)….

Regards

System

Re:SALARY OR DIVIDENDS

No there aren't any legal reasons. A lot of people make reference to the national minimum wage but this doesn't apply to directors as they are officers of the company rather than employees.

HMRC and the Treasury don't like dividends because they (a) have a reduced tax charge attached to them and (b) don't attract national insurance contributions.

There is no reason (on the face of your post) as to why they can't take £5,000 tax and the balance in dividends. You appear to have done the relevant tax planning so if it is beneficial for them then tell them to go ahead and do it. Just bring their attention to the increased corp tax - bearing in mind it will rise on 1 April 208 to 21% and 1 April 2009 to 22%.

Best wishes
Steve

System

Re:SALARY OR DIVIDENDS

Thanks for your reply.

Thanks for your comments – you made some interesting points.

As you noted I had carried out some tax planning, but it looks as though I have made a fundamental oversight and that’s the fact although paying a £5k salary (would be tax efficient) and the rest in dividends this may (would) pose a problem long-term, especially regarding paying sufficient NIC contributions to still qualify for state pension – it’s my fault I should have included this in my first question.

Having researched this issue on the internet it looks as though a salary of around £8,500 / £10,000 would attract sufficient NIC to still qualify for a state pension, whilst minimising the tax costs today.

From what I can gather the issue of “how much NIC” do I need to pay in order to still qualify for a state pension seems to be a grey area. It's a question that the revenue will not answer.

Regards

System

Re:SALARY OR DIVIDENDS

Bowlingbazza wrote:

From what I can gather the issue of “how much NIC” do I need to pay in order to still qualify for a state pension seems to be a grey area. It's a question that the revenue will not answer.

You may find the following helpful:

To build up a qualifying year of entitlement to a State Pension through earnings in 2007/08, you need to have earnings of at least £4,524 a year on which you have paid National Insurance contributions, or are treated as having paid contributions.

Therefore, a minimum salary of £5,000 would still entitle the directors to a basic state pension. The above quote was taken from 'State Pensions - Your Guide' http://www.thepensionservice.gov.uk/pdf/pm/pm2oct07.pdf
Hope this helps

Tom

System

Re:SALARY OR DIVIDENDS

Tom

Thank you for that. I will read through with interest.

Again, thank you.

System

Re:SALARY OR DIVIDENDS

In this situation we tend to have the directors on a payroll equal to the annual exemption (£5,225). The NICs are covered by the lower earnings limit and won't affect their entitlement to state pension.

Kind regards
Steve

System

Re:SALARY OR DIVIDENDS

Steve

Thanks for your response - much appreciated.

Regards