Ltd Companies - Directors wages / divs

[Deleted User]

Hi,

Can somebody please explain the processes of directors paying themselves wages which are NMW or even below and also paying themselves dividends?

From what I gather, a director can pay themselves a wage below minimum wage as they are not classed as employees even though they may do field work i.e. a plumber (Water Technician - LOL).

By doing this they avoid paying tax and NI or at least lowering it.

So the tax threshold is around £6k and you pay tax @ 20% up to £37k. After £37k you pay tax @ 40% up to £150k then it’s 50% thereafter.

So the advantage of paying a lower salary i.e. minimum wage is that you will only get taxed @ 20% for a couple of grand.

Dividends are taxed @ 10% for the first £30k then at 30% for the remainder.

(Don’t shoot me as I don’t do payroll or tax and these figures seem to be in my head. I haven’t checked if they are correct)

Can somebody please expand on this and give me the full picture?

deanshepherd

Basically..

Office holders and their famililes are not subject to NMW legislation unless they have a contract of employment. Most close company directors do not.

If a director pays himself up to the primary threshold (£110 p/wk for 2009/10) then there will be no NI to deduct on his salary even though he qualifies for state pension and benefit purposes.

Assuming no income other than his company, this salary payment will be fully covered by his personal allowance so he will pay no tax nor NI on the salary.

The company will receive a CT deduction for the salary payment at, presumably, 21%.

Dividends are not subject to further tax on the director unless he goes into the higher rate tax band. Therefore, on net income of up to approximately £40k, the director will pay no tax or NI whatsoever personally.

The company will pay CT at 21% instead and avoid NI altogether.

[Deleted User]

Thanks Dean.

Could you also explain personal allowances for directors please and the limits?

Gem7321

The personal allowance applies to everyone, for 2008-09 it is £6035. So if, for example, a sole trader has profits of £6035 they won't pay any tax as the personal allowance covers it in full.

If a sole trader makes a profit of say £10,000, you deduct the personal allowance of £6035 and £3965 is chargeable to tax.

If the business makes a loss the personal allowance is lost. However you can disclaim capital allowances to make the most of your personal allowance, then claim the CA's in the future when you're making profits.

Sorry for jumping in there Dean! Please correct me if I'm wrong

deanshepherd

Absolutely correct Gem.

Of course, since Gordon Brown's scrapping of the 10% band debacle, we now also need to consider the NI threshold separately from the personal allowance as they are now disparate.

[Deleted User]

I knew the allowance before tax was around £6030. I just thought there was something extra to it.

So as an example...

A director can pay himself £5,720 (£110 p/w) and not have to pay Tax & NI but still covered by the same benefits as paying NI.

So if he paid himself £30k in dividends, would have to pay 10% tax on these?

Also, assuming that he cannot live on £110 p/w, how does he pay himself the extra from the dividends as dividends can only be issued after the first 6 months for interim and in the next financial year for final dividends?

Gem7321

Don Juan wrote: »

So if he paid himself £30k in dividends, would have to pay 10% tax on these?

No, as he would have received the dividends net of tax.

He could take payments as repayment of his directors loan account. And he could charge interest on his directors loan account but this would mean submitting a quarterly CT61 return.

deanshepherd

Don Juan wrote: »

how does he pay himself the extra from the dividends as dividends can only be issued after the first 6 months for interim and in the next financial year for final dividends?

Where did you read that?

A dividend can be declared whenever you like (providing you actually have some profit to distribute).

[Deleted User]

deanshepherd wrote: »

Where did you read that?

A dividend can be declared whenever you like (providing you actually have some profit to distribute).

It was an assumption as per the DFS paper.