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New Client works under PAYE but is about to set up own LTD.

New Client works under PAYE but is about to set...

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Hi

I have a client who works for an employer under PAYE he has been with the employer for 10 years and uses his tax free allowance in this employment, he is in the process of setting up a limited company where he has designed a tool to help in his trade.  The first year is going to result in a loss,  he is going to continue working for his employer in the same way as he always has.

when the company begins to make a profit, does he have to pay himself a small salary through PAYE or can he just pay himself in dividends.  It would be more tax efficient for him to pay himself in dividends if the rate of corporation tax is reducing to 19%.

Thanks in advance.

Replies (15)

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By Duggimon
12th Feb 2016 10:12

He can but doesn't have to

There's no obligation to take a salary, he can take all his money out as dividends, so long as the company makes enough profit to pay dividends.

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By A E Scott
12th Feb 2016 10:14

I thought as much, but wanted to check, thank you for the quick and prompt response.

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Out of my mind
By runningmate
12th Feb 2016 10:23

Employer

I wonder what his employer thinks about this?  It is possible the employer may argue that the design of the tool belongs to the employer not the employee.

RM

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By A E Scott
12th Feb 2016 11:36

The employee has made the product in his own time and with him using his own tools, he has saved his employer time per job thus making the employer more money.  The employer is not aware of the tool only that his employee is good at his job.  now i know if an employee is using their own tools we have a self employed aspect, but i dont think HMRC will object to him being an employee as i believe he will fail all other areas of the employment status indicator test etc.  There is not going to be any change in the employee/employer relationship, this is merely a side line for the employee.

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By SteLacca
12th Feb 2016 11:40

Not indicative of self-employment

A E Scott wrote:

now i know if an employee is using their own tools we have a self employed aspect,

That's not strictly true. Whilst use of one's own tools may be one of the badges of trade, it does not in itself indicate self-employment. I'm employed and use my own pen, but would never claim that made me self-employed.

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By Tim Vane
12th Feb 2016 11:46

Tools indeed, or so it seems.

First of all, what is an LTD? Some kind of technical abbreviation I'm sure.

Secondly, the fact that he made the product in his own time is irrelevant - the IP could well belong to the employer, so he should seek legal advice.

Thirdly, if this tool is so useful, how come he is making a loss?

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By jon_1984
12th Feb 2016 13:01

Would Suggest

Your client reviews the position with a solicitor or lawyer familiar with the Copyright, Designs and Patents Act 1988, and the specific provisions for tools designed whilst under employment. This is because the concept of "own time" may or may not be enough for your client to own the relevant rights. 

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By cbp99
12th Feb 2016 13:54

Dividend tax

Don't forget that dividends over £5k will be taxed at 7.5% or more from April.

It may be more efficient, assuming the company is eventually to make a profit - and if not, dividends are out of the question-,  if the company pays salary up to the Secondary Threshold - or less if it takes his overall income into higher rate.

 

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By Bryn Holloway
15th Feb 2016 12:03

I'm not sure I understand that.  This person has another employment which uses all his personal allowances.  Why would it ever benefit him to take (any) salary rather than dividends from his new venture, even if he can avoid NI?  Even under the new dividend tax regime, he will always pay less tax on dividends than he would on salary.

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By silverghost
15th Feb 2016 12:29

Tax neutral

If the director takes out, say, £8k in salary he will be taxed at 20% basic rate. This receives tax relief in the company at 20%, so for some accelerated tax payments he takes £6.4k out of the company for a net nil tax rate - which is better than 7.5% if the dividends are more than £5k.

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By Bryn Holloway
15th Feb 2016 12:58

You are, of course, quite right.  My mistake was in not considering the company's tax relief on the salary.  Thank you.

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By mely
15th Feb 2016 13:25

IR35?

Edit - never mind, I misread the information.

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By geoffwolf
16th Feb 2016 10:01

Doesn't it depend on the nature of the tool?

if the tool is of use only in his employer's direct competitors then I can see that the rights probably belong to the employer.

However if the tool is of general application,I would have thought the rights remain with the inventor.

 

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By Robert Lovell
03rd Mar 2016 16:49

Any Answers Answered

Giles Mooney and Tim Good of TAXtv answer the original poster’s question in this short video clip.

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By cheekychappy
03rd Mar 2016 16:51

Late to the party?

robertlovell wrote:

Giles Mooney and Tim Good of TAXtv answer the original poster’s question in this short video clip.

 

So did other respondents. Several weeks ago.

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