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Dividends as Income

The most tax efficient way to pay shareholders

Afternoon all, my first post so hope somebody can advise!

I am in the process of gifting 20% of my company to a well deserving long serving collegue, along with a directorship (where I will remain as Chairman with the casting vote). This is also so he can obviously recieve 20% dividend share, with myself the remainder. I also would like to take advantage of paying our wages as dividends. 

Now, say we both take 12k as a salary and top up our wages as dividends. He is at present on a wage of 26k so to top this up as dividends would require 14k, as my wage would also, before any lump sum dividends are distributed at year end. My question is, as those dividends are after corporation tax of 20% would that essentially being paid for by the company and a share of my dividend? It certainly is more than a 20% cut. Though he is contracted to recieve the 26k via payroll befor any dividend. What is the fairest way to all parties?

Thanks in advance!

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By SXGuy
08th Nov 2018 16:58

Salary is before ct, dividends is after.
Tax on dividends is a personal liability not a company one.

Any company money used to pay tax on dividends should be treated as a loan.

Unless I've completely missed your question, because it isn't very clear if I'm honest.

What does your accountant say?

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to SXGuy
08th Nov 2018 17:21

Ok. Minimum salary to optimise NI and PAYE contributions. Monthly 'wages' to be subsidised by dividends up to contracted level. As the company would be paying the CT before the 'wage' dividend, the company is effectively subsidising the income tax that he would have paid on PAYE. Obviously he would then pay tax on any dividend received, but at a much lower rate and without NI.

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08th Nov 2018 17:10

If you are planning to do this without taking legal and tax advice, you deserve all the problems (and missed planning opportunities) that you will end up with.

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to Accountant A
08th Nov 2018 17:22

Well that's why I was here to maybe get some advice? But thanks for the comment, well done.

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to frogadoo
08th Nov 2018 17:36

frogadoo wrote:

Well that's why I was here to maybe get some advice? But thanks for the comment, well done.

Let me put it another way, unless your company is worth less than, say, £1,000, you would be stupid in the extreme not to engage a solicitor and experienced a tax professional to advise you.

I hope that's clearer for you.

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By spilly
08th Nov 2018 17:34

The fairest way for all parties is for you to get proper paid advice. Although we like to help where we can, this is really a situation where your accountant should be helping you as they will know your business better than we do.

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to spilly
08th Nov 2018 17:42

Fair enough. I was wondering whether it was a simple thing where I was missing something but obviously not. It is as complicated as I feared! Thank you

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to frogadoo
08th Nov 2018 18:07

frogadoo wrote:

Fair enough. I was wondering whether it was a simple thing where I was missing something but obviously not. It is as complicated as I feared! Thank you

Are you intending your dividends to be four times his dividends for ever ?

If not, there's another problem to be solved.

And is £12000 the optimum salary ? Maybe, maybe not. We don't have enough information to say.

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08th Nov 2018 17:39

Don't forget about all the other costs and tax liabilities associated with this plan. You'll need sound tax advice, starting with the treatment of the "gift" (which it ain't) and following on from there. You aren't going to get very far without consulting your accountant.

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to Tim Vane
08th Nov 2018 17:43

That's all in hand but thanks anyway

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to frogadoo
08th Nov 2018 20:27

frogadoo wrote:

That's all in hand but thanks anyway

So if you are already getting tax advice why are you wasting our time?

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08th Nov 2018 18:05

I hope the high street accountant who gets this walked into him tomorrow knows about the Employment Related Securities rules. There are many who don't.

Either way, I think he will need to start a few paces back from where the OP is looking to start off his "quick question"

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By Ruddles
to AnnAccountant
08th Nov 2018 19:13

Not to mention the potential treatment of dividends paid on the back of an employment contract.

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09th Nov 2018 07:14

Let me save you some fees: your plan does not work.

Let me save you some money: you could do with hiring an accountant.

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09th Nov 2018 10:37

Your first step would be to stop calling dividends wages, or top up wages, or referring to them as remuneration at all.

You need to start with first principles, find the definition of the two terms and realise they are not in any way interchangeable.

That is where most of the problems with your plan stem from. In a general sense, what you are proposing is not far from a system that could work from you but your lack of understanding means it may not be wise, cheap, advisable or possible as you suggest. Get an accountant.

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09th Nov 2018 14:51

No-one else seems to have noted that the other employees are contracted to £26k but this is being ignored ...

Frogadoo - employment law issue. (And poss E’er NICs, E’ee NICs, PAYE, Pension, SL ...)

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By Ruddles
to atleastisoundknowledgable...
09th Nov 2018 14:57

I did :)

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09th Nov 2018 17:52

How much is 20% of the company worth (and it's unlikely to be 20% of the value of the whole company, unless you have some pretty strange articles)? Whatever it is, it will be classed as remuneration for him when you transfer your shares to him, unless you have a very good case for it being a personal gift to a great friend. Probably no PAYE and NIC, as the shares are unlikely to be readily convertible assets, but you need to talk to an accountant who, as others have said, understands the employment-related securities rules.

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