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Most tax efficient way to pay directors/owners

The two Directors of my company (Company A) want to set up another company in order to charge company A for their time. They will then be paid by the second company as dividend with a small salary to keep them under the NI and PAYE threshold. They will pay corp tax on any profit in the second company but presumably will minimise the PAYE and Ni ers liability.

Is this method still acceptable to the revenue. The new company is set up purely as a way to charge out their costs. They also intend to take funds directly out of company A with these transactions being offset against as payments on account against the invoices generated from the new "service" company.

The other alternative would be to pay a dividend through the existing company (which they will not be employees of but just shareholders). The only problem here is having sufficient profits in the business to keep paying regular dividends.

Has anyone got any other suggestions or alternatives to minimising the personal tax and NI bill for company or is this still the best most acceptable setup?

Many thanks



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12th Oct 2010 13:15

Directors are surely employees

I've never heard of this setup before.  Surely if they are directors of company A they are going through the payroll?



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By blok
12th Oct 2010 13:19


Have you heard of IR35?

The directors are effectively moving from one place of employment to another where they substitute salary for dividends.

It will work until you are caught and then it will be unwound with interest and penalties.



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There must be a reason ...

why they can't take their payments directly from company A! I'm not sure you have disclosed the full facts although I'm not sure why poster 2 is quoting IR35 as we have no idea what company A actually does yet.

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By blok
12th Oct 2010 13:50


I read it that the directors cant take dividends from company A as they are not shareholders!

If that is the case, I mention IR35 because no matter what company A does, if an employee leaves employment of company A and works for company B, who invoices A, it is not on!  Classis IR35.

Perhaps the OP can clarify the shareholding of company A for us.



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No they are shareholders of A too ....

which was why I was suspicious of the treatment employed. However, no point us debating the point if the OP has gone away now! Incidentally, I suspect that you are ultimately correct and company A is caught by IR35 and they think they have come up with a cunning plan to avoid!

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By blok
13th Oct 2010 09:13


On  the one hand the OP says:

"The two Directors of my company (Company A) want to set up another company in order to charge company A for their time".

I assumed that the OP was the shareholder and that he employed two seperate directors.


but, you are right he then goes on to say:

"The other alternative would be to pay a dividend through the existing company (which they will not be employees of but just shareholders)."

does this mean they are already shareholders or are they going to be issued with shares?


Maybe the OP wishes to pay divis but cant because Company A hasnt got reserves!  However given the way the question was set I dont know that the OP has even thought that through properly and was just on a fishing excercise.


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By paulh47
13th Oct 2010 10:32

Reply to Blok

The Directors are shareholders of company A but not employees. They want to set up company B to charge themselves out to Company A -ie create income and profits in Company B to pay dividend and minimal salary.

They will be employees of company B, the main problem I have is that there are insufficient reserves in A to pay what the Directors want to take out on a monthly basis. By creating company B and invoicing A there could be potential profits for a dividend paid regularly to cover their drawings.

I am an employee of Company A and am not a shareholder.

Thanks for the reply and sorry for not coming back top you sooner.

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By blok
13th Oct 2010 11:55



The directors set up newco, which provides consultancy to oldco and charges an appropraite fee.  Oldco makes profits and the shareholders of newco take this post tax profits as dividends rather than salary.  The only reason for doing this is becasue it is impossible to get divis from oldco?  Correct so far?

In theory it could work.

You need to ask yourself though:

1. Will the payment by olco be wholly and exclusively for the purposes of the trade? Or is this an artificial step inserted?  I cant answer this for you, only a high court judge may be able to do that conclusively.  Given the history between the directors and oldco you need to be wary.

2. If you get your tax deduction in oldco for the consultancy, is oldco making sufficient profits to get the use of this?  (I get the impression that oldco may not be very profitable, or may have some losses being carried forward).   If this is the case you have an overall tax cost because newco will be taxable from the start.

3. Company law.  You say that these individuals are directors but not employees.  I wont go down that route argument just now (there was a whole debate on this not so long ago) but suffice to say that people may have their own thoughts on this.  Personally, I cant see the distinction and struggle to accept that a director is not an employee, but appreciate there is doubt.

4.  My IR35 point is still very valid.  The directors are working for oldco albeit through newco.

5.  There will be an additional associated company for Corp Tax, potential for higher tax bills overall.

6. Can oldco recover the vat that will need to be charged by newco (assuming t/o > £70k)?

7. Additional accounts and compliance.

Maybe I am just being cautious.  At the same time I am sure that you are not the only person doing this! 

There are contractors solutions I know about that may welcome this sort of thing if you were being very aggresive.

Out of interest how much is at stake here?  What are you planning on sheltering?


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By paulh47
13th Oct 2010 13:47

Blok Reply

Hmmm......Yes you are correct, not a massive amount at stake though, its more about timing of drawings the Directors want to take out of what profits are available.

I think my preference would be to have the directors as employees of oldco and pay dividends when possible to cover drawings with any shortfall picked up with salary - I want to aviod an overdrawn DCA if I can.

Thanks again.

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