Dividends v salary? Director contract implications

Director contracts and employment allowances / pensions

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We have a family business (limited company) with 2 directors and no other employees. One currently receives the basic salary (£758 per month) + minimal dividends (due to rental income) and the other isn't paid by the company as is a higher rate tax payer from other employment income. Looking at trying to take more out of the company in 24/25 but due to higher corporation tax rates, reduced dividend allowances and higher dividend tax rates, trying to work out the most tax efficient way of doing so. 

I'm looking at various different scenarios but one consideration is to pay higher salaries and make use of the employment allowance. I understand that this would require both directors taking a salary higher than the secondary threshold (£9,096) but does there need to be an employment contract in place for both directors to be able to benefit from this allowance? Neither currently have an official contract.

My understanding is that if employment contracts are drawn up, by then having 2 contracted directors, we meet the requirement to set-up a pension scheme to auto enroll each diretor, even if we then both opt out. Is my understanding correct here? This would then result in more costs that would need to be taken account of (although I haven't yet looked into how much that would be). 

Many thanks. 

 

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By I'msorryIhaven'taclue
09th Feb 2024 13:41

Kat123 wrote:

I'm looking at various different scenarios but one consideration is to pay higher salaries and make use of the employment allowance. I understand that this would require both directors taking a salary higher than the secondary threshold (£9,096) but does there need to be an employment contract in place for both directors to be able to benefit from this allowance? Neither currently have an official contract.

As an office holder, a director doesn't necessarily need an employment contract. A director's service agreement (aka a director's service contract) - a beefed up employment contract - is sometimes used instead.

But a director with none of these things might nevertheless be regarded as an employee for your Employment Allowance purposes.

Always assuming, of course, that your company isn't a square-peg of a company that doesn't qualify for EA.

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paddle steamer
By DJKL
09th Feb 2024 13:52

Pensions are long term not necessarily a bad idea.

They are expensive to create value within if set up is left until much older but their existence can certainly make IHT planning much simpler with the ability of the donor to use the pensions to fund living costs freeing up other assets for lifetime gifts.

Personally I would embrace a company pension scheme albeit of better quality than bog standard AE offerings (remembering that an employer can set up an AE compliant scheme with no employee contributions and 8% or more employer contributions)

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By JB101
09th Feb 2024 15:51

I hope that only one director holds shares (dividend waivers are usually not a good route to go down).

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By FactChecker
09th Feb 2024 15:53

Sorry, but this is one of those rare occasions where no matter how much information you provide ... it won't be enough to get you a comprehensive set of answers specific to your particular needs. That is what an accountant/adviser can do for you (with the luxury of finding out all the other pertinent facts - including what you're really trying to achieve).

They could also ensure that your understanding of each relevant aspect is correct - which I'm not sure is currently the case. For instance:
- "the employment allowance" is not an 'allowance' that generates cash for the individuals; it is a means whereby (subject to meeting all the requirements) the *ER* can save some of the ER's NICs - which of course aren't currently being incurred.
- and why you're interested in AE pensions absolutely defeats me (as you've hinted, lots of admin and easy ways to get it wrong but with no advantages that you couldn't have achieved outside of AE).

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Replying to FactChecker:
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By paul.benny
09th Feb 2024 18:06

+1

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