Hello everyone, I have been a lurker here for a while and found some brilliant advice, but I couldn't find anything on this one! :)
We don't do salary/PAYE for ltd company accounts usually and this one has me perplexed! The client has just formed a new ltd company and I researched the usual salary+dividend split advice everywhere - but I just realised: as this is a new company (first month financial year October 2011) and the director was employed under PAYE for the earlier part of the tax year, how do I deal with rest of the Oct-April PAYE tax year as a director? Surely he has already eaten up his £7475 allowance in the employment prior to this directorship? If this is so is it ok then for him to just take a dividend by way of payment from his new ltd company for the rest of this PAYE tax year? I am probably missing something reall obvious, but as I say we don't usually get involved in the payrol sde of things!
What you need to do is check with your client what their income for 2011/12 is.
If they have used up their tax free amount then should just declare a dividend for anything they take from the business.
If they havent used up their tax free amount you should put a salary through the Ltd company to maximise the allowance (without paying any PAYE or NIC) and the remainder that you want to declare you can do so as a dividend.
Oh - in that case then I am confused about all the sources I have looked at stating the director should take a minimum salary of say £7475 (no paye) and the rest in dividends to save tax? Now even more confused!! :0) (as you can tell I don't do this!!)
-- Edited by timiambeing on Thursday 27th of October 2011 12:57:52 PM
Thanks Mark I think that makes sense - just confused with paye tax years and company financial year!! I presume when someone starts a limited company it is pretty much always going to be part way through the paye tax year - unless they start it on April 5th! So when it comes to this directors salary/dividend split I keep reading about, this is based on the paye tax year not the company financial year, so if they join the company or start a company part way through the tax year and they have been employed before (as opposed to sef employed self assesment) then we need to get the tax/ni they have paid to date and go from there.
Maybe a basic payroll package would help, if just for this one client!
This is so basic and like I say I feel quite ashamed I don't know, but also we have only had self employed clients before now and that is easy - the tax year is the financial year. So am I getting this correct:
1) Limited Company - the corporation tax return will go in based on the company trading financial year 2) Directors Salary - this will be as any employee - April to April - appropriate forms completed and submitted as required when running a payroll 3) Directors Dividends - submitted as part of the self assessment service, on a personal tax return by the usual SA dates
But I still have two questions, will I be entering the clients PAYE/NI and salary details on this SA form as well, and if so are the figures requested for the PAYE tax year or for the company financial year?
I think where I am falling down here is that the filing of end of year paperwork is usually the area for the accountant but somehow I have been volunteered in that position!! even if I hand this over to an accountant before year end it is important I keep the records and deal with the PAYE properly for the duration of the year :0)
Hi Tim, The SA is a summary of all the financial transaction for this director - April to April - i. e. salary, dividends bank interest share sold insurance claim... at the same time if he paid during the financial year any tax's, or expenses and not claimed it from the company, hop this answer your question. Abd
sorry, just a flying visit to the site and I've not read this one properly yet. HOWEVER... Before advising your client that dividends are ok ensure that the client is not caught under IR35 legislation as that would restrict any dividends to the remainder of 5% of turnover after other running costs (such as your fee's!).
That aside from what I've read so far you seem to be on the right lines.
Assuming that this is not a personal service company (such as an IT Contractor) then don't forget that dividends are only available against profits so be careful the client doesn't go taking more than they should as travel costs, pensions, etc. will all change the amount available for redistribution.
Talk later when I've had a chance to read this thread properly.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Directors are not necessarily employees, so don't need to receive the minimum wage, or any wage. It think what is confusing you is that there is a level of pay that means the director doesn't pay tax or NI but still recieves some NI benefits.
The optimum amount was £476/month, but increased to £589/month this tax year.
Remember also the IR35 legislation Shaun points out. I'm sure he'll be back soon and give you chapter and verse.
Directors are not necessarily employees, so don't need to receive the minimum wage, or any wage. It think what is confusing you is that there is a level of pay that means the director doesn't pay tax or NI but still recieves some NI benefits.
The optimum amount was £476/month, but increased to £589/month this tax year.
Remember also the IR35 legislation Shaun points out. I'm sure he'll be back soon and give you chapter and verse.
Kris
Yes Kris, I think I am getting confused with the idea of using up your tax allowance on the salary bit as if you had to! Obviously under the £35k limit you could pay yourself all dividends and still pay no tax - however I suppose for the companies tax situation it's better to pay yourself a salary from that as this is tax deductible for the company so reduces net profit and therefore the CT bill?
I am still getting a bit confused at contrasting advice as to how much to pay in salary though - and still get NI benefit entitlements. Some now recommend the full allowance of £7475 - because even if the company does then have to pay Ers NI and the director as employee pay a little Ees NI - the reduction on the net profit and therefore CT makes this worth while taken as a whole?
Much to learn this first time round, and to think I gave all this up years ago - only offered to deal with this for a friend!!! A paying friend I hasten to add! :0)
sorry, just a flying visit to the site and I've not read this one properly yet. HOWEVER... Before advising your client that dividends are ok ensure that the client is not caught under IR35 legislation as that would restrict any dividends to the remainder of 5% of turnover after other running costs (such as your fee's!).
That aside from what I've read so far you seem to be on the right lines.
Assuming that this is not a personal service company (such as an IT Contractor) then don't forget that dividends are only available against profits so be careful the client doesn't go taking more than they should as travel costs, pensions, etc. will all change the amount available for redistribution.
Talk later when I've had a chance to read this thread properly.
kind regards,
Shaun.
No IR35 situation as far as I know, isn't that to catch contractors? Client is a tyre fitting company and director so a totally trading normal business. Thanks.
Then I would go with Kris's suggestion re dividends for the remainder of this year picking up the salary question from the next reporting period.
Yes, the last Government virtually killed a very lucrative UK industry by using a sledgehammer to crack a nut. We're still waiting on the promises of the current Government to repeal this very flawed legislation.
Kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Obviously under the £35k limit you could pay yourself all dividends and still pay no tax -
Hi Tim,
I maybe taking this a little out of context, as Shaun and Kris have advised the dividend only remuneration makes sense for this year but not automatically for future years.
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Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
Obviously under the £35k limit you could pay yourself all dividends and still pay no tax -
Hi Tim,
I maybe taking this a little out of context, as Shaun and Kris have advised the dividend only remuneration makes sense for this year but not automatically for future years.
Yes I see what you mean, in subsequent years it makes sense to utilise the tax allowance to the maximum - I have come up with a scenario below based on advice from this source: http://www.hanleyandco.co.uk/tax-and-business/DirectorSalary.php
Say 2011/2012:
£7,475 = Personal Allowance
£35,000 = Higher Earnings Threshold
£42,475 = Total Earnings (before HRT kicks in)
So in the perfect situation:
£7,475 - pay as Salary - no tax/£86 total NI
£31,500 - pay as net dividend (Gross £35000*.90)
£38,975 - total earnings to avoid higher tax rate
Dividends are grossed up by the 10% notional tax credit to arrive at total earnings - so HMRC take £38,975 and make it £42,475 - so make sure you gross up net amount when looking to avoid slipping into higher tax rate!!
Phew that took days of getting my head round accountantspeke! I know this is not an actual scenario and we can't hit the exact figures to avoid tax when trading - but if you wanted to see the max. you could earn before higher tax rate kicks in on the dividends I think that sort of nails it :0) This is based on advice to use up all the allowance as the savings in CT for the company gains you (as the owner of the company as well as an employee) an extra £350 or so for the extra £90 odd NI. But in the end a few pounds tax or NI isn't the worry - understanding 'the why' was the worry for me - think I am getting it now... hope so!! :)
