A perennial question I know but is it okay to replace a salary with dividends? For reasons I'm not sure my (new) client has been paying himself a large salary from his company for many years and not considering dividends. Ignoring the usual issues of sufficient reserves, dividend vouchers, board minutes etc any thoughts as to significantly reducing his salary and paying a monthly dividend instead to avoid NIC?
Any thoughts and guidance would be greatly appreciated.
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That's true
It's true that it did perhaps cause that case but on appeal it was found in favour of the taxpayer so would the HMRC bring a similar case after this precedent is set? It's also slightly different in that they tried to tax the monies taken solely upon the husband. That said the relevant part here was that they were allowed to take a small salary and then the rest as dividends which was a big part of what HMRC were contesting.
Is this not tax planning rather than income shifting though?
Arctic Systems was ruled in favour of the individual wasn't it? Also it related more specifically to 'income shifting' between a husband/wife to minimise tax liability. What the OP is suggesting seems more like a tax planning scenario for an individual, assuming that the client is director of his company would a low salary + dividend not be fairly standard advice from a tax planning perspective?
Looks like awoodj beat me to it!
Correct that Arctic Systems was S660 income shifting. Paying dividends rather than salary would fall under IR35.
Without going into the detail, it wouldn't surprise me if a sudden change from significant salary to dividends might trigger an HMRC enquiry. Might be worth getting advice from an IR35 expert, given that the IR35 rules are so badly conceived and badly defined.
On the face of it
Nothing wrong with your plan whatsoever.
But - have you considered IR35?
Yes
IR35 would certainly explain the large salary/no dividend structure.
@ OP is the client likely to be inside IR35?
IR doesn't come into it. He
IR35 doesn't come into it. He is a shareholder of his company and entitled to use the dividend route. Of course if he is in reality an employee of another company and just using his limited company to bill them then IR35 would be a consideration - but the question doesn't say that.
You say 'for reasons I'm not sure'. That's your starting point. What does the client say about it then you can determine if they have a valid reason.
Dangerous
Revenue have been known to go back and say it was salary in previous years too as you can't just reduce someones salary including directors.
If it's unlawful it's unlawful!
Who advised him on previous route? PI claim? Where there's blame there's a claim!
Arctic Systems was brought under S660, the legislation which was active at the time.
As regards whether the change to dividends is lawful, that has no bearing on whether HMRC will deem the change worthy of investigation. A significant proportion of the 'justification' for IR35 is that the FUD factor makes a proportion of people pay tax as though they were caught by IR35, for fear of the overhead of an investigation rather than because they believe a contract to be caught. There is a degree of defence in taking expert advice before making the change, as it establishes that the taxpayer had good reason to believe their action to be legitimate. Taking advice after HMRC begin an investigation doesn't provide this defence.
So am I.
As regards whether the change to dividends is lawful, that has no bearing on whether HMRC will deem the change worthy of investigation. A significant proportion of the 'justification' for IR35 is that the FUD factor makes a proportion of people pay tax as though they were caught by IR35, for fear of the overhead of an investigation rather than because they believe a contract to be caught.
Seems to be working on you.
@Kirkers. I'm not being rude. I'm just telling it like it is.
@ the Innkeeper. Aww, bless!
And so am I. Sounds quite hypocritical of you considering you seemed to have no idea about taxable compensation yesterday.
Maybe it would be best if you just stopped baiting people.
Rich!
There are a lot of people here who haven't got the first clue what they're talking about.
And for the last few days we've all been thinking that about you.
Do you have to be so rude?
Salary v Dividends
You don't give any details of the company structure. Assuming that he is the sole director and shareholder he can decide what he wants to pay in salary and dividends, subject to having sufficient reserves etc. HMRC cannot dictate what level of salary he pays himself - even NMW does not apply unless he has an explicit employment contract with the company.
As has been pointed out, if it is a "personal service company" then IR35 comes into play and HMRC can substitute a deemed employment payment.
If it is a husband and wife company or there are other shareholder/directors then a little more circumspection is required. In particular where there are relatives involved you need to beware of the settlements legislation. But, as has been shown with Arctic Systems, this is not insurmountable.
There may, of course be other reasons why he wishes to take a larger salary. Particularly if he wises to obtain tax relief on personal pension contributions or has other employment related expenses.
Great idea
Good plan to avoid NI. Hope you don't complain when the NHS can't afford to treat you or your family if you are ill
Second state pension
Watch out for accrual of the second state pension, although this is on the cards to be abolished, I think it is still there?
@Portia
You are now being even more patronising. Any comment that starts off 'With respect' is normally mostly not at all respectful.
From your profile
you seem to be the new kid on the block. Us old timers do not mind robust debate but you are just a very rude person
Mortgage
The OP's example recently happened to me - on enquiry it turned out that the mortgage company preferred salary to dividend on application.
(FUD: It's what I get when considering adding to a thread that has turned sour)