how do directors live? - The Book-keepers Forum (UK)

Dotty · Member

how do directors live?

adi2402 · Senior Member

A director can be paid any salary. What you read is probably more relivant to close companies.

What you are talking about is a method to reduce tax and NIC. With the above method the PAYE threshold would not be breached for tax and NIC and the divi's if kept under the higher rate tax band would generat no additional tax.

If this practice were to be adopted the quarterly or annual divi could potentially be allocated to the directors loan account rather than paid in cash and the director could then draw down on this loan account as and when.

As always there are potential issues with this scenario.

Dotty · Member

Thanks Adi

am I to take it that if a director needed a more substantial regular salary on a monthly basis, then they would have to get it through paye and pay the normal tax and NI.
Then also be able to get dividends either quarterly or annualy out of any company profits.

Cheers

Dotty

Merlion ABS · Senior Member

You will probably find that many directors take a monthly sum out of the business based on forecasted figures for the coming year. This is in addition to the low salary they take.

I have several clients that do this. Monthly salary of about £550 so they pay a little NI and some tax, then about 2-3k a month extra under dividend.

As mentioned above, a low salary and the rest by dividend can maximise the tax savings.

Then when the year end accounts are done, the companies accountant will make the relevant adjustments and sort the dividends to cover what they have taken out, provided there is enough profit to cover it.

If not enough profit, the excess will most likely go into a directors loan account.

-- Edited by Merlion ABS on Tuesday 14th of September 2010 07:07:06 PM

adi2402 · Senior Member

It should be remembered that taking a monthly dividend is not really advisable as there have been cases where HMRC have interpreted this as a salary and applied tax/nic as such. More advisable to take a larger quarterly or fewer divis in the year.

Merlion, I might not be following you but it seems that the monthly amount that you are reffering to are not dividends, as no divi counterfoils and minutes are produced etc, but rather just a draw down against their loan account. The loan is then topped up when the accountant prepares the annual dividend paperwork / accounts etc.

Have seen this method a few times but be careful not to drawn down to an overdrawn loan account position and then be unable to clear down the loan due to a lack of p&l reserves to issue a divi. Can easily happen in these tough times or where the director does not inform his accountant of a downturn in trading until near the year end.

Dotty, yes as you say, if more cash is need you can pay whatever salary you wish through the PAYE system then add dividends in at the year end etc

Dotty · Member

Thanks Merlion and Adi

you have explained it in a very clear way for me, I have noted everything down for future reference. It has been salaries and dividends that has put me off training to do bookkeeping for LTD companies in the past.

Now it is not so frightening I might give it a go, once my payroll exam is out of the way.

Cheers

Dotty

adi2402 · Senior Member

No worries, good luck with your exam when it comes around.

Shamus · Forum Moderator & Expert

Of course, this assumes that the company does not come under IR35 as the only dividends available in that instance would be from the 5% of turnover allowed for running costs so the dividends would be taken after things like accountants fee's.

If all that your company has been doing is bookkeeping then it would be ill advised (and probably not covered by your PII) to be giving tax advice to clients.

Limited companies are quite stright forwards when you get your head around the fact that the company is a seperate legal entity in it's own right and quite seperate to it's ownership.

Conversations that discuss the company as little more than an extension of its owner are rooted in a sole trader mentality which to be honest is still in the minds of many company owners as well and they need to be properly informed of their legal obligations to the company.

A director has a fiduciary duty of care over the company not dissimilar to that which a parent has over its child. To treat the company assets as their own and to generally act in their own rather than the companies best interests may render the veil of incorporation null and void.

Looking after limited companies for anything other than normal bookkeeping duties can be a case that a little knowledge is a dangerous thing and I would strongly advise for you to get a firm understanding in company tax law, perhaps via exams with the AAT or ATT before persuing limited company clients.

That said, many people on here with no formal qualifications specific to limited companies work perfectly well with such clients but this is often after many years of working with limited company clients.

If you go down this path, please take my advice and don't give them any advice that you do not feel yourself properly qualified to give. Certainly don't advise cleints on the best payment structure for them as you will soon find yourself as their solicitors first port of call when things get nasty with HMRC on the back of your advice!

Good luck with whatever you decide to do,

all the best,

Shaun.

Merlion ABS · Senior Member

adi2402 wrote:

It should be remembered that taking a monthly dividend is not really advisable as there have been cases where HMRC have interpreted this as a salary and applied tax/nic as such. More advisable to take a larger quarterly or fewer divis in the year.

Merlion, I might not be following you but it seems that the monthly amount that you are reffering to are not dividends, as no divi counterfoils and minutes are produced etc, but rather just a draw down against their loan account. The loan is then topped up when the accountant prepares the annual dividend paperwork / accounts etc.

Have seen this method a few times but be careful not to drawn down to an overdrawn loan account position and then be unable to clear down the loan due to a lack of p&l reserves to issue a divi. Can easily happen in these tough times or where the director does not inform his accountant of a downturn in trading until near the year end.

Dotty, yes as you say, if more cash is need you can pay whatever salary you wish through the PAYE system then add dividends in at the year end etc

All dividend vouchers and minutes are appropriately done once the year end accounts are done. basically everything goes via the loan account and the dividends offset this.

Merlion ABS · Senior Member

Dotty wrote:

Thanks Merlion and Adi

you have explained it in a very clear way for me, I have noted everything down for future reference. It has been salaries and dividends that has put me off training to do bookkeeping for LTD companies in the past.

Now it is not so frightening I might give it a go, once my payroll exam is out of the way.

Cheers

Dotty

To be honest, this isn't really something that should concern a bookkeeper. This sort of practice is done on the say so of the accountant so it will already be set up. All you would have to do is post the transaction to the correct nominal codes etc.. and forget about it.

I would never advise a bookkeeper to offer any sort of advice concerning VAT or TAX unless they are qualified to do so. This should always be left to the Accountants or specialist.

ADAS · Guru

Shamus wrote:

Conversations that discuss the company as little more than an extension of its owner are rooted in a sole trader mentality which to be honest is still in the minds of many company owners as well and they need to be properly informed of their legal obligations to the company.

Agreed Shaun, that's one of the hardest points for Director - Shareholders to understand.

I often get accused of being pedantic when asked a question like "how much money have I got left in the bank" and allways answer "No idea but the company has...". It's the only way I know to drill home seperate legal entity.

Payments of salary and dividends are rewards for very different things and the difference is important.

RobH · Expert

I think a monthly dividend is not a problem so long as the paperwork is in order, ie dividend certificates are produced and minutes signed for the 'monthly meeting'. As far as I can make out a company could, if it so wished, distribute dividends on a daily basis! Need to remember that dividends will need to come from profit after CT has been deducted/reserves, so a good idea for a bookkeeper would be to suggest monthly management accounts.

Rob

adi2402 · Senior Member

we have had issues with monthly divi's and hmrc in the past and as a firm took a stance to avoid issueing monthly as there is more problems than benefits.

Speaking about companies, I attended a mercia course the other day and the subject of micro companies was raised. If someone has a link they may want to post one, otherwise i will try later. Seem a very interesting proposal

Dotty · Member

Hi everyone thankyou for all the input it is appreciated.

Dont worry about me giving advice to anyone, I always point people to accountants when they are above my scope of training.

However in exams you are given transactions to post for Limited companies and it is good to know what is behind these transactions.

Training courses only give you the bare bones, but my curiosity goes further hence all the reading. Then I use you guys to fill in the gaps. However I know not to overstep the mark.

So when I ask all these questions it is just because I am very nosey and like to learn.

Cheers

Dotty

ADAS · Guru

adi2402 wrote:

we have had issues with monthly divi's and hmrc in the past and as a firm took a stance to avoid issueing monthly as there is more problems than benefits.

Can i ask how recently this has been a problem?

-- Edited by ADAS on Wednesday 15th of September 2010 10:14:57 PM

adi2402 · Senior Member

it gets brought up internally every so often, i'll see i can dredge something up in print when i get back in the office.

Nicola27 · Veteran Member

Hey my directors are...how do i put it....a little bit dodgy, what with me not having any formal bookkeeping training, sometimes I am unsure if i have posted things correctly.

If we were to get audited etc would any blame fall on myself or could i get fined/in trouble?

Most of the time when i ask them questions i'm told to "be creative"

2 of our suppliers are paid cash, and the amounts NEVER match up so i quite often have 2/3k go out the bank and i am unsure if its to a supplier or intercompany transfers (3companies on the go) so i know alot of stuff i post to intercompany at one end come out shorter at the other end, or doesn't come out at all!

I looked at one supplier who had £10k worth of payments and i was missing 20 invoices, that I knew off and i was told to make them up, and spend the rest of the money somehow. I can't ask all the suppliers for all the missing invoices as they already hate me for asking for all the payments we have made to them since May, and most of them have the attitude "You have paid us, why do we care if your books dont match, you should know what you are paying"

I have invoices which are paid and no idea how (tbh i can't be bothered to look through a years worth of paperwork and mispostings for all the invoices) and i'm told to just delete/ credit them.

When i spoke to the accountant he said that the bookkeeping has long been a problem. I am aiming to try and made everything balance with what the suplliers are telling me untill august and moving forwards from august try to do everything by the book.

But obviously with the large amounts that dissapear its unlikely I will be able to operate a smooth running/efficient/correct ship. Will this be my fault or can i play dumb?

Nicola27 · Veteran Member

p.s my company also pays all the directors mortgages, gas bills, phone bills, sky bills, insurance for which i never have bills, and have been copying the old bookkeepers practice of posting them to the relevant directors loan accounts with a tax code of T9.

Can you believe that with the mess they have they advertised for an office assistant, haha i would like to see you average admin girl deal with this! haha!

RobH · Expert

Hi Nicola,

may I ask whether you are employed or self employed?

As if you are employed I think there is no reason for you to be filing SOCA reports etc but if you are self employed you will have responsibilities under MLR.

On your second post I would feel posting these items to dla is about all you can do, I suppose if hmrc got really nasty, which isa possibility, they may deem the payments as salary and have it all grossed up and demand the tax and ni.

Rob

Nicola27 · Veteran Member

Hi I am employed, and not even close to being qualified!

Well hopefully HMRC will take it out on them and not me if any sh*t hits the fan

-- Edited by Nicola27 on Thursday 23rd of September 2010 05:19:10 PM

Nicola27 · Veteran Member

Hey i just googled SOCA reports(didnt know what they were being a novice and all).... i think that would a bit extreme for them though wouldnt it, it not like they are pocketing millions :-s