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IR35 - salary and dividends

My client has set up a limited company which he is confident falls outside of IR35. I have advised that the higher the salary drawn from the company (as opposed to dividends) the less likely that HMRC will challenge the employment status. However, assuming my client wants to be very risky and draw as much in dividends as possible, how much would you recommend he take as salary? His personal allowances are used up elsewhere so could he just take it all as dividends with no salary?

On another point, I know there must be enough reserves in a company to cover dividends drawn, but is this net or gross dividend? As the tax is only notional, can we ignore it and take the net figure drawn?
SC

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By Anonymous
06th Nov 2008 18:47

Assuming he is not a higher rate tax payer
I would still be inclined to put a salary through of £5435, especially if the other income he has is not a salary. He will pay tax at 20% but the company will get relief at 21/22%, so marginal saving. The main benefit is a tick in his national insurance box as being a qualifying year for state pension, benefits etc.

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By NeilW
06th Nov 2008 17:43

Everything
There is no requirement to pay a director of a company anything under PAYE. In fact you don't even have to register a scheme in this sort of situation.

All after tax profits and distributable reserves can be paid as dividends, and dividends are always calculated as 'net dividends'. The 'tax credit' an individual gets is just an accounting fiction.

NeilW

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