A company doesn't have to carry forwards any retained profit.
If the company has made £9500 after tax then all of it is available to distribute as a dividend.
If the director has paid no salary then they have paid no NI meaning that they will be affecting their own pension entitlement.
Taking dividend rather than salary is also less cost effective than taking salary as salary is taken from pre tax profit as an expense of the business where dividends are taken post tax.
The best approach is a mix of salary and dividend but attempts to manipulate tax in this way will attract the attention of HMRC.
That said, there is nothing illegal about it even if they don't like it. You just need to be prepared for the attention that manipulation of one's tax affairs brings.
kind regards,
Shaun.
p.s. welcome to the forum.
__________________
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.
I hesitate to add to Shaun's answer, as I am an amateur in all this, but I would say that my impression is that HMRC do not look particularly harshly on such mild manipulations of the tax system as, for instance, taking a salary of just below the national insurance threshold and the rest as a dividend. I'd scarcely call that manipulation at all, more just using the structure of the tax system to pay no more than you are obliged to, in the way that those who designed it assumed that it would be used. It's scarcely the K2 scheme of Jimmy Carr fame.
(FWIW, I do think taxes are both much too high and massively too complicated, but I have no wish to derail the thread with political questions rightly considered outside the scope of this forum)
Anyway, I hope HMRC do not look particularly harshly on it because it's exactly what I propose to do with the obscene wads of profit collected by our small company.
[checks accounts]
OK, we do not actually have to worry about "the rest as a dividend" here. If we attract HMRC's attention they will probably send us a food parcel out of pity.
-- Edited by chatcat on Wednesday 18th of July 2012 11:33:19 AM
-- Edited by chatcat on Wednesday 18th of July 2012 03:18:54 PM
on the manipulation point I was refering more to the original post in that Jayne states that the director intends to take all dividend and no salary.
HMRC inspectors don't get to choose who they visit anymore (much to their annoyance) but back when they did a favorite was spotting companies whose directors were paid less than they needed to live on and then taking dividend for the remainder.
As I say, there is a gap between what is illegal and what is frowned upon... Take the Jimmy Carr case that you refer to as a good example... He did absolutely nothing illegal but MPs and the papers saw fit to go after him for the way that he was quite legally managing his tax affairs.
What I'm saying is that if you (legally) manipulate your tax liability then one has to be prepared to defend one's position.
kind regards,
Shaun.
p.s. don't forget that food parcels a benefit in kind! lol
__________________
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.
Would also just highlight Shaun's point on £9,500 profits after Tax, as dividends can only be paid from retained profits after Corporation tax has been paid.
Can be a common issue that small businesses issue dividends before final tax calc has been done and if dividend were to push them into negatives that is a definite no-no.
Just mention this as if profit figure of £9,500 was before tax, there would be £1,900 CT to pay, so less than £8,500 to issue as dividends.
frowned upon... Take the Jimmy Carr case that you refer to as a good example... He did absolutely nothing illegal but MPs and the papers saw fit to go after him for the way that he was quite legally managing his tax affairs.
I would offer in JC's defence that it was probably not he who thought, "I know, I'll put my company money in an offshore account, and borrow it. That'll save me some tax". He probably took advise from a very well paid advisor. As a layman, he would probably have no idea what K2 was. If I go to a professional for advise, I'd expect the best advise, and assume it to be above board, which his was.
I am a great believer in social responsibility, and paying ones dues. When it comes to tax. If I was told that this was perfectly legitimate way of saving tax, I would accept that advise. I am not saying it was morally correct though.
Barbara, I am pretty sure there are very few subjects, outside the scope of this forum
Wella wrote:Barbara, I am pretty sure there are very few subjects, outside the scope of this forum
As we regularly prove Bill
The real problem is keeping the subject matter tied down to bookkeeping and accountancy!
There's a great little ethical arguement burried in that last post of yours and I'm just deciding whether to take up the gauntlet (by the way, I trade through a limited company but don't take dividends due to a similar moral standpoint).
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 paid salaries. Shareholders receive dividends from profits. If a business owner is a shareholder and director they can pay themselves salary, dividend or both.
For a shareholder taking a small salary (typically £6k to £10k subject to circumstances) and then withdrawing profits by dividend is normal practice. This is not an issue for HMRC and is quite different from Mr Carr. To my knowledge there is no evidence of HMRC having a problem with this. The press however, are getting stirred up over people contracting as a company simply to save tax. (see BBC staff in the spotlight recently)
It would be most unusual for an accountant to advise a director/shareholder to pay salary only out of some moral duty. This is not tax avoidance. It is flexible tax planning for business owners and is within both the spirit and letter of the law. What Mr Carr did was arguably not within the spirit of the law but is technically legal.
Jayne - The amounts you are discussing would be OK as a dividend. However, the amount is probably just over the personal allowance (subject to circumstances) and the tax efficiency would be a saving of a few pounds as opposed to paying it as PAYE.
HMRC really don't like it, MP's dont like others doing it, and the BBC in it's worst red top mode love to jump on a bandwagon.
The big change with HMRC is that it is now computers rather than inspectors who decide where their eye is to fall next. Back in the day directors paid less than a living wage were chased for deemed salary in that if you could not live on what you were being paid then HMRC regarded the dividend as salary.
Since IR35 there has been a lot less of this sort of approach by HMRC but it doesn't mean that their staff have not been indoctrinated into the belief that people who take dividends are basically the spawn of satan.
The issue is that whilst HMRC quite officially do not like this and do everything in their power to try and stop companies doing it there is absolutely nothing illegal about it and any accountant worth their salt can argue the case for a client and with a few exceptions win... Actually, winning is the wrong word as generally if HMRC know that something is going to end up being properly represented they'll move their resources onto something that is likely to produce a return.
When advising clients it's always a good idea to warn them that this perfectly legal way of distributing profits is something that HMRC are not at all happy with. Such is espeichally relevant where clients border on IR35 territory.
Also, before Jayne pays the didvidend she should refer to some of the posts above espechially in relation to the £9.500 being post tax profit.
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.
(by the way, I trade through a limited company but don't take dividends due to a similar moral standpoint).
