Is my accountant really right?

Is my accountant really right?

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Can I Say sorry if any of the people reading this are offended by me daring to question my accountant, however what he has just told me seems almost to hard to believe and I didn't want to embarrass myself or him by asking him directly.

I like to think of myself as a fairly clever man and so normally understand these things but this one has shocked me.

My wife and I own and run a small company, profit £300k. Traditionally I have been paying myself £65k salary and her £38k (she works full time in the office whilst I am the managing director). We own the shares 1,000 each.

My (new) accountant has told me that by swithching to paying a small salary each of £6,000 and taking dividends of around £32k each we will be taking home the same amount of money between us but the overall amount we are paying the taxman will be about £20k lower.

He has also said that this will mean more money being left the company by doing this so I will have to pay some further tax in the future but by this stage I was a bit flummoxed and so didn't really take that bit in.

It seems too good to be true hence me just checking he is right.

Could I ask anyone to confirm / advise any ideas.

S Wilkinson

Replies (13)

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By MikeyBaby
03rd Mar 2009 11:57

Pension contributions
Bear in mind also that your ability to contribute into a personal pension plan is restricted by your earnings, and dividends are not 'earned income'.

Company contributions can assist in planning in this area, but as always, this needs to be considered carefully.

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By User deleted
03rd Mar 2009 11:35

Is my accountant really right?
Paula ALL matters have to be considered not just tax savings!! The client needs to be warned of losing out on future state benefits no one can live on basic state pension which is all that the client would draw if he only paid £6k salary !!

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By Paula Sparrow
03rd Mar 2009 10:54

That's a bit like saying
just pay the tax and save yourself the cost of some decent tax advice.

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By User deleted
03rd Mar 2009 09:44

Is my accountant really right?
I think Accountants are "too glib" in advising clients to only draw small salaries the loss of State Second Pension benefits never seems to be taken into account when giving this advice I would have thought that a salary of say £25k would increase their state benefits considerably reduce CT liability and save the fuss of consulting Financial advisers!!

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By Paula Sparrow
02nd Mar 2009 23:22

State Benefits
As long as your earnings exceed £90 per week for 2008/9 and £95 per week for 2009/10 your entitlement to sickness, unemployment, etc etc will be protected.

For pension purposes, entitlement to basic state pension is also protected, and you only now need to show 30 years of earnings at this level to qualify for the full basic pension. But you MUST make sure that you submit P14s for each year for the earnings to be recorded on your NI record.

The State Second Pension is calculated by reference to level of earnings (excluding dividends), but anyone earning less than £13,500 will be treated as though they were actually earning £13,500.

The best advice I can give is to speak to an IFA about the implications of restricting your NI contributions, and whether it is worth investing the NI savings in a pension scheme to make up for any potential shortfall in State pension

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By AnonymousUser
02nd Mar 2009 16:56

Don't fall for the NIC myth!
National Insurance is just a tax like all of the others and all of those taxes are put in one big pot and allocated to whatever the government of the day deems most worthy.

Part of the NIC he will be saving by paying dividends went to fund a war and to pay off Sir Fred. Do you feel better now?!

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By User deleted
02nd Mar 2009 15:11

Is my accountant really right?
What I am not clear on is how much is lost in future state benefits when only a small salary is drawn?Also is Penny referring to Settlement legislation when she mentions there might be "problems" arising from 50:50 split?I thought we were safe onthis till at least 2011!!

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By martinfoley07
02nd Mar 2009 15:11

do you mean ......
..."Sir Fred", Penny?
Or do you have the inside track on her Majesty's take on this one !!!
(or indeed HRH The Prince of Wales' take on it. The esteemed knight is Chairman of The Princes Trust, which one assumes/hopes is highly embarassing.)

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By User deleted
02nd Mar 2009 14:17

New accountant is correct
I suspect your old accountant had taken notice of HMRC suggesting at one point that it was going to crack down on personal allowance salaries and dividends for close companies (which is what husband and wife companies are).

However, nothing ever came of this in the way of legislation - so really the position now is you'd probably be mad not to take you new accountant's advice - it is difficult to make legislation work retrospectively so it's highly unlikely to cause any problems and will save you a lot of tax.

It's strange your old accountant didn't suggest changing your salary levels though - this is pretty much par for the course advice rather than cutting edge brilliant tax advice.

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By User deleted
02nd Mar 2009 14:07

Thankyou
Penny, Jon, Geoff and The Captain

I appreciate your comments and assistance, thanks.

Again as I said it was not that I did not trust him but it was merely that it just seemed too good to be true! He did show me some calculations at the time but the basics did beat me.

Thank you all for your time and effort.

Simon

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By geoffemtacs
02nd Mar 2009 13:58

Yep he's right
...although he is guilty of a little bit of window dressing. Right now you're taking £103K out of the company and leaving a big chunk of profits 'in the company'. He's suggesting you only take out £76K and leaving even more in the company. It's no surprise that what you personally give the Revenue will be substantially less. To begin with there's £27K that's no longer being taxed at 40% because you haven't had it yet.

What he's doing is getting the maximum out of the company's coffers in as tax-efficient a way as possible. The amount you leave in there can come out at some future date and hopefully as dividends in a year when you're not a Higher Rate taxpayer.

But he saves an awful lot because you're no longer paying 11% employee NI on each of your wages and the company is no longer paying 12.6% employer NI on £92K of the wages.

Sharp bloke. Keep and trust!

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By MBK
02nd Mar 2009 13:34

It depends....
The thing to appreciate is that the bulk of the saving using dividends is National Insurance, not income tax or corporation tax.

If the £300k profit is after your salaries then going the dividend route will save you virtually nothing.

But if the £300k is before your salaries then you will save quite a bit - but nowhere near £20k.

You need to ask for the calculations - something must be missing from the calculations. But it is probably worth doing - providing your accountant knows what he is doing setting it up.

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By User deleted
02nd Mar 2009 13:29

Yes it's legal
Basically what's suggested is a currently legal but slightly artificial (do you or your wife actually value your labour at £6K a year each?) National Insurance dodge.

You will save a good deal of money but forfeit the right to feel morally superior to retired Royal Bank of Scotland executives.

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