Must an owner / director take a salary?

Must an owner / director take a salary?

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A client took early retirement from one of the banks two years ago aged 50. He has a large pension some of which is taxable @ 40%.

He started running a small consultancy company turning over about £65k per annum and makes profits of £50k. He has no need of a salary or dividend from the company and plans to build up a large cash balance in the company say £150k over three years and then wind it up and take the cash out as a distribution on winding up and obtain the 75% taper relief allowance and then live overseas.

In the meantime, should we return a small salary for him say £5k per annum in order to give him some earned income and a small NI contribution?

What risks does he face if he draws nothing by way of salary or dividend (I appreciate the status issues around trading/ investment companies) but am thinking more in terms of HMRC attacking the final distribution and treating it as income as opposed to capital etc. Are there any issues to do with earn-outs or
The Contributions Agency looking to add NI to the final distribution because he has taken no earned income from the company?

Thanks in anticipation of your help.

Peter Hodgson

Peter Hodgson

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By User deleted
08th Mar 2008 07:37

Income shifting ?
There is nothing in law that stops an individual giving his effort away for free. That's why HMRC gets upset about the issue.

Neil - is this answer still correct ? Or is it likely to be superseded by the income shifting proposals ?

Seems to me that if the director is not actually employed by the company - and receives no remuneration at all - then he/she cannot be said to have any "entitlement" to any particular income. If you voluntarily give the fruits of your efforts to the company for nothing, surely the income shifting concept simply does not apply ?

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By NeilW
10th Jun 2006 07:31

State Pension
The main reason for paying a salary over the NI limit is to secure the state pension - that and to use up the personal allowance which would otherwise be wasted with dividends.

If your client doesn't need either of these facilities then why bother with a salary?

There is nothing in law that stops an individual giving his effort away for free. That's why HMRC gets upset about the issue.

However if you build up a large cash balance, you may struggle to get the business asset taper relief on wind up. Although as yet I haven't come across anybody who has been denied it. Others may have different experiences.

NeilW

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