New limited company has two directors. The first is going to start working for the company immediately, and the second is going to work his notice period of six months in his current employment before working for the company. Once both directors are working full time, and once the new tax year starts (they both have significant other income this tax year), they will each draw a small (equal) salary from the company and equal dividends.
Obviously the directors wish their income from the company to be drawn as tax efficiently as possible.
The first director would like to draw some income from the company during the next six months, to reflect his contribution to the business while the second director has remained in his previous job. The options I have considered so far are for the first director to pay himself a salary during the next six months, or to issue a new class of shares to the first director to allow a separate dividend to be declared for him alone.
Taking a salary is not tax efficient for the director in question, and a dividend would be the better route - but I am concerned that this would be considered to be disguised remuneration if it were made by means of an alphabet share.
Do others have experience of such a situation that they would be willing to share? Thanks in advance for any assistance.
Replies (7)
Please login or register to join the discussion.
dividend waiver?
not perfect but an alternative to alphabet shares.....but neither offer a particular satisfactory answer....
see link
below:
https://www.accountingweb.co.uk/topic/tax/dividend-waivers-get-details-right/481882
general guidance is use it sparingly, and for commercial purposes rather than pure tax avoidance....by doing so should not flag it up to hmrc. And the circumstances you describe appear to fit in with both criteria.
just have A and B shares
this is the simplest option. The divdends can vary in future years without the need for dividend waivers etc.
Another option is he operates as a consultant for a short period and takes a fee from the mash-up for his services.
Depending on the figures, this may not be suitable, as you are possibly incurring class 4 NIC.
There is one phrase in the opening post ...
... which, if it found its way into HMRC's hands, could prove to be problematic if an Inspector were so minded to make an issue of the case.
"... to reflect his contribution to the business" In other words it is implicit from that statement that the intention is to reward the director for his efforts and not his investment. So it is possible, if highly unlikely, that the payment could be taxed as earnings whatever you decide to call it.
All I would suggest is that you try to avoid using such comments in board minutes etc!