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Optimum company salary & divi 2014/15

Optimum company salary & divi 2014/15

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It's that time of the year again when we must consider the optimum salary

and dividend package for 2014/15 for a small one director Ltd Co.

Am I right in thinking it is as set out below?

Salary £7956 - no tax or NI payment issues

Actual paid Dividend £30518 (ie £33909 x 90%). No income tax payable in SA return.

Proof: £7956 + £33909 = £41865 which is rate at which 40% tax is payable.

Thanks for your input

Replies (48)

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By Jekyll and Hyde
04th Feb 2014 12:50

What about £2000 NIC exemptions?

Why not factor the NIC exemption for 2014/15. I am looking at making salary around £10,000 to factor this in.

Having said the above, it all depends on number of PAYE employees/Directors the comapny has.

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By EOAKS
04th Feb 2014 18:37

Reason for revised/increased amount...

Jeykll and Hyde is right.

As from 6 April 2014 all businesses will be allowed to reclaim employers’ secondary NIC payable up to a £2,000 limit. Therefore, it will now usually be best advice for a director to receive a salary of £10,000 per annum (Personal allowance) instead of limiting the payment to the NIC secondary threshold as has been usual up to now. The employer incurs employer’s NIC of £282.07 and the employee pays NIC of £245.28. (anyone like to check my figures!)

As the employer’s NIC payment is below £2,000 then this amount will be returned thus making the taking of additional salary more tax efficient overall compared with the taking of dividends below the £10,000 level.

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By rboggon.yahoo.co.uk
04th Feb 2014 20:57

This is indeed "groundbreaking"news!

Where do I find out more about the reclaim of employers' secondary NIC, please?

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Replying to TomMcClelland:
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By Briar
04th Feb 2014 23:28

Aweb breaks ground again

Absolutely! Hadn't linked the 2k NIC exemption myself. So thanks to Aweb community again. Even better where Husband & Wife are directors/shareholders (and possibly even the kids?)  

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By DMGbus
04th Feb 2014 22:14

£2k NIC relief

The logical way for the £2,000 employers relief to be claimed against employer's NIC costs will, to keep the Collector of Taxes hound dogs at bay, require some input from the payroll software used - and probably some changes at HMRC end given that Collector of Taxes does not, it seems, get a breakdown of total liabilities - just month totals tax+NIC minus CIS and other EPS credits.

 

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By MBK
05th Feb 2014 13:14

Yes - but watch out

If the director has other income (eg rent or interest) then paying £10,000 may not make sense.

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By iavago1
05th Feb 2014 13:41

Surely the OP is right.

Otherwise if you pay up to £10000 in salary you will pay £245.28 in employee national insurance that you did not have to pay.

The £2000 employment allowance is only off-set against the employers NI not both.

Therefore the optimum salary/dividend package would be as the OP said, for which the purpose is to avoid paying any NI.

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By Steve Kesby
05th Feb 2014 13:46

@ iavago1

It's better to pay 12% 'ees NI (245.28) on the additional £2,044 salary in order to save CT of £408.80 (£2,044 x 20%).

However, as MBK says, it's even better for the company to pay interest or rent to fill the gap, which is just as tax deductible for the company, but isn't liable to NIC at all.

Individual circumstances vary. One size will never fit everybody.

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Replying to Accountant A:
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By iavago1
05th Feb 2014 14:06

Thank you Steve.

I hadn't considered that point.

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By Briar
05th Feb 2014 23:26

Neither had I!

So the saving by paying £10k is £163.52 (408.80-245.28). My clients will be very happy with that (a reasonable case of wine)

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Replying to AndrewV12:
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By alberto1969
20th Feb 2014 08:44

£163.52

By paying £10,000 would we not be saving £408.80 as the £245.28 would not be payable with the Employment Allowance?

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By rboggon.yahoo.co.uk
06th Feb 2014 12:03

Has HMRC come up with the mechanics of this £2k employers' relief?

If not, does anyone have an idea how it might work??

 

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Euan's picture
By Euan MacLennan
06th Feb 2014 12:28

Claim on an EPS

May I ask if Moneysoft will be updating its software to allow the Employment Allowance to be claimed on an EPS and to calculate the allowance automatically, up to the limit of £2,000?

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By Richard_Carey
06th Feb 2014 12:40

yes

@Euan

We are currently adding this to the software. From April 2014 there will be a 'tick-box' to indicate that the employer qualifies for the Employment Allowance. Payroll Manager will handle the allocation of this allowance and the relevant EPS automatically.

 

We will publish further guidance on this on our website in the next couple of weeks.

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By puzzel
06th Feb 2014 13:10

So if you don't use it all

You can have it offset against any outstanding PAYE liability?

"Can HMRC use my unused Employment Allowance against my other PAYE liabilities (ie tax, student loan repayment etc)?The Employment Allowance is based on your employer Class 1 NICs liability shown on your Full Payment Summary (FPS), and normally would be set against your employer Class 1 NIC liability as it arises during the year. The maximum award you can have in a year is the lesser of the total of your Employer Class 1 NIC and £2,000.If you have not used your Employment Allowance award in full (e.g. because you claimed the Employment Allowance late and did not have enough employer Class 1 NICs liability for the remaining part of the year), HMRC will offset the balance against other current or future PAYE liabilities, so the allowance is not lost.Where you make a claim for the Employment Allowance after the end of the tax year, this will be offset against any outstanding PAYE liabilities, or current/future liability, or you can ask HMRC for a payment of any balance, provided you have no outstanding PAYE liabilities." Sounds too good

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By Steve Kesby
06th Feb 2014 14:22

@ puzzel

You're reading too much into it.

What they mean is that if your monthly Ers NIC is £500 and the monthly Ees is £400 and the monthly PAYE is £600, and you don't realise you can claim the EA until month 10, then you can claim the £2,000 in month 10 (it's not then limited to £500), because you will already have paid more than £2,000 Ers NIC in the year.

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By puzzel
06th Feb 2014 14:27

No it's the middle to last bit

If you have not used your Employment Allowance award in full (e.g. because you claimed the Employment Allowance late and did not have enough employer Class 1 NICs liability for the remaining part of the year), HMRC will offset the balance against other current or future PAYE liabilities, so the allowance is not lost.

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By Steve Kesby
06th Feb 2014 14:50

That's the bit...

... I'm talking about too, in my example.

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The triggle is a distant cousin of the squonk (pictured)
By Triggle
20th Feb 2014 11:06

Hi Alberto

The £2k allowance only covers employer's NIC not employee's NIC so the £245.28 would be payable (but compensated for by the CT saving).

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By chewmac
20th Feb 2014 14:39

Husband and wife company

Hello, so a company with two directors would be saving £163 x 2?

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By redman7
24th Feb 2014 05:48

re

So the tax savings for 1 x shareholder at Primary Threshold vs a £10k Salary are :

CT saving of £408.80 ((£10,000 - £7,956) x 20%)

less Ees NI charge of £245.28 ((£10,000 - £7,956) x 12%)

Total Tax saved £163.52

 

Also I believe a £10k salary enables more cash to be extracted to the higher tax threshold as a combination of cash and dividends, so if you have clients that push their salary and div right up to the threshold and keep anything above that in the company then an additional £204.40 can be taken out (pre Ees NI). The tax savings on this might be minimal (10% ER) or nothing at all depending on future circumstances, but it's still a benefit to get out more now I would think...

Would like someone to verify that though :-)

Regardless, £10k seems optimal as long as they're on a standard tax code

thanks

RM

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By Gabba
24th Feb 2014 09:09

Is there a minimum salary payable?

If a director/shareholder has other income in excess of the personal allowance, is there any requirement to pay a salary from the company or is there any risk by not paying a salary? 

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By Peter Bonetti
24th Feb 2014 09:36

This is odd to an ex VAT man

There is so much bile towards the tax man on this forum and there is disgust at the peddlars of avoidance schemes and yet everyone falls over themselves to advise on how to pay the least amount of tax by using this minimal salary/dividend wheeze.

All perfectly legal of course but surely it's entirely artificial and avoidance just as much as any other (legitimate) means of reducing tax.

Not trying to start an argument (really) but it's an observation that people who berate the tax man for trying to maximise tax (when, in fact, the idea is only that it's the right amount) while engaging in a feeding frenzy to do the complete opposite.

I understand that you all are engaged to reduce tax by as much as possible but it does make me smile when I see threads like this and then see others where there is such indignation when the tax man gets fed up and digs his heels in (and yes, I acknowledge that some go too far).

Not expecting any agreement but I wonder if anyone out there feels remotely uncomfortable at someone getting paid below minimum wage and getting very nicely topped up with dividends while other people just pick up a salary and pay their way fully?

The tax we pay is directly related to the amount of money the Exchequer needs to run the country so if some pay less, the rest pay more.

 

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Replying to CWservices6064:
By ShirleyM
24th Feb 2014 15:35

We've been down this road before

Peter Bonetti wrote:

There is so much bile towards the tax man on this forum and there is disgust at the peddlars of avoidance schemes and yet everyone falls over themselves to advise on how to pay the least amount of tax by using this minimal salary/dividend wheeze.

All perfectly legal of course but surely it's entirely artificial and avoidance just as much as any other (legitimate) means of reducing tax.

My personal guide to acceptable tax planning is to ask myself the question  ... is there a ceiling to it, ie. ISA's, pension contributions, directors pay, they all have a limit to the amount of tax that can be saved. You can only invest a certain amount in ISA's, and if you extract too much in dividends then you pay extra tax, you can't pay yourself unlimited directors remuneration without paying extra tax, and so on.

The fully artificial schemes will reduce tax for as much income as the people are willing to put into it, and there is no ceiling to the amount of tax that can be avoided. If the government truly intended those methods to be used as tax planning, then they would have capped it, as I cannot see any government purposely allowing unlimited income at 1% tax (or thereabouts).

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Replying to CWservices6064:
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By qad999
24th Jul 2014 01:44

don't mean to be rude but "Ex

don't mean to be rude but "Ex vat man" needs to remember that although he pays tax as well .. his salary is a 100% tax on the rest of us

its difficult enough to run a business  (involving evening" unpaid" work complying with sometimes idiotic hmrc rules .. for nil pay !! .....cant see many civil servants doing that) ....without someone telling you as an officer that should take MORE salary .. .. thats a matter for the directors/officers ..   not civil servants ..

 

Consider this.. numerous politicians accept  directorships with plc's .. do you really think the money they take as salary bears any resemblance whatsoever to the amount of work they devote to that role ?

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Replying to CWservices6064:
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By qad999
24th Jul 2014 01:59

dividends are fine

Peter Bonetti wrote:

There is so much bile towards the tax man on this forum and there is disgust at the peddlars of avoidance schemes and yet everyone falls over themselves to advise on how to pay the least amount of tax by using this minimal salary/dividend wheeze.

All perfectly legal of course but surely it's entirely artificial and avoidance just as much as any other (legitimate) means of reducing tax.

Not trying to start an argument (really) but it's an observation that people who berate the tax man for trying to maximise tax (when, in fact, the idea is only that it's the right amount) while engaging in a feeding frenzy to do the complete opposite.

I understand that you all are engaged to reduce tax by as much as possible but it does make me smile when I see threads like this and then see others where there is such indignation when the tax man gets fed up and digs his heels in (and yes, I acknowledge that some go too far).

Not expecting any agreement but I wonder if anyone out there feels remotely uncomfortable at someone getting paid below minimum wage and getting very nicely topped up with dividends while other people just pick up a salary and pay their way fully?

The tax we pay is directly related to the amount of money the Exchequer needs to run the country so if some pay less, the rest pay more.

 

 

if people want to take dividends thats up to them , remember they are not tax allowable for the company and the shareholder gets no earnings related state pension from this income .. why are you trying to make businessmen feel bad about simply complying with the law and arranging their affairs in a way so they don't pay any more than is  legally due ?.. its b~~~~y hard running a business . try it and see  :(

 

PS lots of businessmen make less than a minimum wage.. why??   because they might have low proftability ..and  If thye take more and make their company insolvent .. then  they contravene the insolvency act..Exvatman has a civil-servant mind-set .. and there  truly is no hope  

 

 

 

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By Minnie136
24th Feb 2014 09:56

Extra work

I made the saving £112.  Hopefully this will not be offset by additional work filing in real time and the £2k will be readily claimable by filing all months in advance since you can't really charge extra fees or there would be no saving at all!

Peter Bonetti - The structure of minimum salary and dividends is tax planning within the law.  The overall tax bill of an entrepreneur may be less than a salaried employee but they are also bearing many risks and do not have job security and other benefits (sick pay, pension, holiday).  If a higher rate taxpayer extracts the dividends fully then the tax rate is 40% (less deductions for business expenses) which is the same as the salaried employee.  If the entrepreneur does not extract the cash then they may qualify for entrepreneur's relief on sale of the shares/dissolution, there are many rules to follow here so I disagree that entrepreneurs are taking money away from the Exchequer. 

 

 

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By Peter Bonetti
24th Feb 2014 10:05

Agreement

I said I didn't expect agreement but job security, really? Does anyone have that? I presume you have used the same answer since the 70's.

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By thisistibi
24th Feb 2014 11:12

@Peter

Minimum salary/dividend is not "entirely artificial" at all.  For somebody who owns and runs their own company, they have a choice as to what proportion salary and what proportion dividend to pay themselves.  There is no reason to choose any particular split other than the tax levy which is charged, so that is reason enough to structure the company in such a way that it minimises tax (something every person is entitiled to do).

That is a totally different scenario to a tax avoidance scheme (something associated with abusing tax rules, i.e. to use them in a way they are not intended) or to take advantage of international tax rules in such a way to avoid paying a fair share of tax where you operate (e.g. locating activities offshore).

You can't paint all tax planning with the same "tax avoidance" brush... next you'll be telling me you shouldn't claim child allowance if you can afford not to, because its costing the Exchequer money it needs to run the country.  Or that investing in an ISA is tax avoidance.

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By Peter Bonetti
24th Feb 2014 11:23

No need to explain

I appreciate the responses but there is no need, all the more so when they attempt to put thoughts in my head or words in my mouth. Please allow me the courtesy of doing that myself.

 I was making an observation, nothing more.

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By thisistibi
24th Feb 2014 11:28

@ Peter

No point posting in a discussion forum something that isn't up for discussion

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Replying to Tax Dragon:
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By Peter Bonetti
24th Feb 2014 16:17

No point

thisistibi wrote:

No point posting in a discussion forum something that isn't up for discussion

In your opinion (and doubtless others) but I have a perfect right if I think it worthy of some discussion. The fact that there has been some rather diminishes your view, I would suggest.

You think I'm wrong. Fine but don't take it upon yourself to censor an alternate view.

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Replying to bernard michael:
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By thisistibi
26th Feb 2014 13:13

Hmm

Peter Bonetti wrote:

thisistibi wrote:

No point posting in a discussion forum something that isn't up for discussion

In your opinion (and doubtless others) but I have a perfect right if I think it worthy of some discussion. The fact that there has been some rather diminishes your view, I would suggest.

You think I'm wrong. Fine but don't take it upon yourself to censor an alternate view.

First you say there is no need to reply, now you say it's worthy of discussion!

Besides, I did not censor your view whatsoever.  You gave your opinion and I gave mine.  This is a well discussed topic, the answer on these tax avoidance discussions always comes down the fact that tax planning isn't black & white, it's shades of grey.  Everyone will have a different point at which they consider tax planning has become morally unacceptable.  That was the crux of my previous comment. 

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By Gabba
24th Feb 2014 14:50

Voluntary tax

If there is a choice as to whether profits of a company are withdrawn by way of salary or by dividend, it would be a poor adviser who suggested the route which incurs the most tax burden for a client. 

A good adviser would of course gain more business for themselves by suggesting the most cost effective option for their client, thus generating more profit for themselves and more tax for the Exchequer, and that's the way the economic world goes round.

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By TTID
24th Feb 2014 16:29

.

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By justsotax
24th Feb 2014 16:38

I think Peter

you have missed the point....if it were a 'wheeze'...everyone would do it....but of course the millions in employment don't choose to leave, set up their own Ltd Co...and then sell there services..because that would mean having to market their company/run a business etc.  As an employee (even in these uncertain times)....if you work for a month you generally get paid for a month....not so if you run your own business.  Of course we can all contribute to ISA's....and optimize the savings that do not get taxed....presumably a wheeze for those who have sufficient savings?...that will be our beloved OAPs then....?

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By carnmores
06th Mar 2014 11:08

all this drivel

its not that complicated is it, anyway thank God for software Payroll Managers comments noted 

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By edwardlowe
24th Mar 2014 04:41

SSP

What about the Director who has Other Income to cover his £10k Personal Allowances.

Has enough Pensions Credits to qualify for a full State Pension.

In 2013/14 you would have put him on a payroll at the top of the Nil Band Rate even though there was no tax savings between Salary and Dividends because he would qualify for SSP. Which as a small company he could fully reclaim.As from the 6 April 2014 this is now not possible.

This employee you would now not put on the payroll but pay only dividends.

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By Darren Loring
04th Apr 2014 19:30

Could it cause a problem re HMRC later?

Hi.

Just wondered if hiking Dirs salary in 2014/15 to £10k, and perhaps reducing divis to keep below high rate tax, and then in a future year having to reduce Dirs salary again when this £2k 'rebate' is removed could give HMRC cause to say that the salary is unrealistic and therefore part/all of dividends in future are actually salary??

 

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By Michaelr205
07th Apr 2014 19:14

Could it cause a problem re HMRC later?

I am of the opinion that if you pay a salary calculated to incur no income tax or national insurance liability and them top it up to a "living" amount with dividends then HMRC could deem the dividends to be disguised remuneration (I believe that is the expression but its late and I'm tired so may be wrong) and thus recalculate the payment as as salary. This would mean that National Insurance would become payable as well as tax at marginal rate. I would guess that, if HMRC went down this route, then they could reasonably argue that PAYE hasn't been properly maintained and charged penalties on this. Obviously interest on any tax paid late.

Also, if no NIC is paid doesn't that exclude that person from claiming certain Social Security benefits when the time comes? I will confess to not being an expert on that side of things.

I totally agree with the comments above about manipulating to save tax like this ultimately costs everyone else more and, as a self-employed person, the rewards of self-employment justify that status without these minimal tax savings.

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Replying to AndrewV12:
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By qad999
24th Jul 2014 02:15

dividend minutes

support your dividends with minutes & tax vouchers now AT THE TIME when you pay them  .. not later (use a template ).. you must be disciplined

if possible avoid journal credits to directors accounts , make it  a proper bank payment ..  belt and braces

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By kar999
09th Apr 2014 16:30

I'm using Freeagent payroll and need to set up 14-15 payroll which has a check box to "Claim Employment Allowance". 

I assume there is no harm in selecting the option even if I only pay a salary at £7696 and not £10,000.

(As in the example above, I'm a sole director with 1000L code but with other investment income of c £1k and I have more than sufficient years pension NI credits.)

Thanks in advance.

 

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Replying to WhichTyler:
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By qad999
24th Jul 2014 01:49

yes ..... tick the box 

yes ..... tick the box  anyway.. just in case you decide later to vote more remuneration.. its your choice as an "officer" to vote more or less .. not civil servants... if hmrc think they know better they are on shakey ground .. hmrc couldn't  run a  fish and chip shop... honestly their website is a shambles .. no-one would seriously "buy" anything from them if they were a real world business

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By Robin-Shipston
15th Apr 2014 10:30

Missing the CT factor?

I'm no accountant but... on this topic in general there is often a focus on personal taxation, rather than a holistic look at total taxation. In all the discussions I have seen on this topic, I have not heard it mentioned once that the 2k rebate will increase profit, and this increased profit attracts CT. Therefore even if your total NI bill is in excess of 2k, paying Director/Shareholders £10k salary still seems the overall optimum solution. The amount of NI that is paid by doing this reduces profit and therefore has a small CT benefit as well, as stated in some of the comments above. Is consideration of the CT on the 2k increased profit not valid?

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By trotters
17th Apr 2014 17:17

Its all about the intention of Parliament

Peter Bonetti - My red lines regarding tax avoidance are based on the will and intention of Parliament. 

We vote in a Parliament to decide these issues and Parliament can change the law within the UK to change both the structures within which business trades and the taxation that businesses pay.

The Companies Acts set out the way that dividends are paid and the Finance Acts determine the rate at which dividends are taxed. If Parliament wanted to it could levy an investment surcharge on dividends or many other ways to make a level playing field, but it doesn't.

I won't advocate using off shore schemes to my clients or artificial planning methods of any kind because these are beyond the remit and control of our Parliament

 

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By SunTzu
27th Apr 2014 09:47

Watch out for other employees

At the risk of stating the obvious, be careful using this approach if the client has a few employees using up the ER allowance because the savings will be less depending on the allowance used up by their ER's.

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By qad999
24th Jul 2014 02:07

taxmen just want you to pay more tax.......its in their genes

even if you comply with the law they say you should still pay more (because they think its "morally right" and then try and make you feel bad

this is inconsistent....someone should explain to them that are there are no morals in tax ... its just "the law"... sometimes its good .. sometimes its  bad ... but its still just the law .. so just enforce it and keep your personal opinions zippered  

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