Whats the most tax efficient route?

Dividends causing trouble

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Hi All,

I have a client who has a gross salary of £125k. For 17/18, the company he works for, of which he is a director, paid him £95k in dividends. The accounts for that company has been filed already including interim dividends paid. Total income £220k

My client is looking at a massive self assesment bill for dividends at 32.5% & 38.1% after tax free allowances.

Q1: Is there anyway he can avoid paying some of this amount in Jan 19?

Q2: How should he best structure his £220k package in 18/19 tax year to avoid paying so much tax under PAYE and SA?

Ideas on the table presently include but not limited to:

  1. Salary of £46.35k
  2. Dividend of £2k
  3. Defined Pension Scheme £40k
  4. £10k consultancy bill offset by self-employed allowable apportioned work from home costs

Thank you

Replies (28)

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By ohgoodgodno
16th Aug 2018 12:11

so you are looking at gross income of about £58k as compared to the £220k he currently gets + pension contributions

whilst its certainly going to save tax, on a practical level is it going to give him the income he's used to or needs?

you don't say if the client is the business owner or just an employee with shares? depending on which is going to affect the options available

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Replying to ohgoodgodno:
accountant
By tljenkin007
16th Aug 2018 16:44

He is part owner and md. he needs 150k pa

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By Adam12345
16th Aug 2018 12:21

With income that high, he is unlikely to have a full £40k annual allowance for pension contributions.

I would also question the £10k 'work from home costs' - a tad excessive?

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Replying to Adam12345:
paddle steamer
By DJKL
16th Aug 2018 13:34

Yes, £10k consultancy income £10k office costs does not sound very clever.

Is there any scope for any of his services to be passed via a company ? The shares in employer company A are not owned by him but by his own company B, thus deferring tax to when he does extract (presupposing he can actually live on less)?

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Replying to DJKL:
By JCresswellTax
21st Aug 2018 09:39

Surely that would be caught by IR35 as he is an office holder of the employer company?

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Replying to JCresswellTax:
paddle steamer
By DJKL
21st Aug 2018 12:43

Hence , "is there any scope"

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Replying to JCresswellTax:
paddle steamer
By DJKL
21st Aug 2018 12:45

I am also only talking about the dividends not the salary, dividends are paid to shareholders, change the shareholder?

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Replying to Adam12345:
accountant
By tljenkin007
16th Aug 2018 16:47

10k costs include 10% allocation of all allowable expenses, business travel , car business use etc

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By andy.partridge
21st Aug 2018 15:16

Basically, the plan for him to pay less tax is to pay him less. Genius, wish I'd thought of that. He must be chuffed.

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Replying to andy.partridge:
accountant
By tljenkin007
16th Aug 2018 16:47

He is ;)

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accountant
By tljenkin007
16th Aug 2018 16:42

He is one of 3 owners of the company.

He would like to take away cash in hand of £150k per annum as a minimum. That he can live on.

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Replying to tljenkin007:
By ireallyshouldknowthisbut
16th Aug 2018 18:11

I've got out my very very small harp that he "needs" £150k cash in hand.

I would explain fairly bluntly:

"you earn a lot of money, you pay a lot of tax"

On a wider point, does he have a spouse who could have some of this shares? Might not work with the business he is at, but that is about all you can do other then pensions carry back (he will only have £10k in the current period)

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By Tax Dragon
16th Aug 2018 19:11

The trouble is people notice the tax they pay on dividends, because it's money they write a cheque out for (to use oldspeak for a moment). They don't think of PAYE as tax because it was never money they had their grubby hands on. And they really are that stupid.

It's worse in the first year when 18 months' worth of the dividend tax is payable in one hit. Get past that and your man should calm down. The ideas set out sound best avoided.

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By Sial
20th Aug 2018 10:40

Is your client married, if he is and depending on the income of his spouse he could transfer some of his shares to her. Other than this, Pensions is a good planning tool but then obviously you don't get the money in hand to spend. On the other hand with the flexible pension rules he could take 25% tax free from the pension pot at age 55 which could be handy in settling his mortgage.

I'd be very wary of £10K consultancy fees working from home.

Thanks (3)
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By petestar1969
20th Aug 2018 11:07

If you want to pay less tax, earn less, end of lesson.

Just pay the guy a huge PAYE salary and waive the dividends, then he'll really have something to moan about....

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By Joe Alderson
20th Aug 2018 11:13

He could look at investing in EIS, SEIS, VCT or SITR shares. There's a risk as always but you can gain a lot of tax relief from those (i.e. 30-50%). It's potentially worth a discussion.

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Portia profile image
By Portia Nina Levin
20th Aug 2018 11:40

I think I'm getting the hang of this tax stuff. If you keep his income below the personal allowance, with £2K of dividends using up the dividend allowance, then your client won't pay any tax at all, and he will have the full £40K annual allowance available for a company contribution. Hes should then rob a bank or something to provide for his lifestyle needs.

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By paul.symons
20th Aug 2018 11:59

There is also the question of risk to consider. The Income Tax on a dividend is a personal liability. If the director's employment is terminated he will have a future liability to Income Tax, with no employment/dividend income to cover it. Shares transferred to a spouse can be used as a bargaining in a divorce: expensive to recover, and the bright spark who made the suggestion may get the blame in either case. When the net pay tops the £120k level, as a rule of thumb, salary is a lot safer.

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Replying to paul.symons:
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By Sial
20th Aug 2018 13:56

Obviously if you don't have a good marriage then you would point out to client the downside to transferring the shares. In a good trusting marriage its a good planning tool.

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Replying to Sial:
paddle steamer
By DJKL
20th Aug 2018 14:30

Safest marriage is a lethargic marriage, neither has the energy to do anything else but remain married.

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By Cheshire
20th Aug 2018 14:49

Of course no good trusting marriage turned into something other than a good trusting marriage. The divorce court staff are all currently being made redundant and then turning to the bookkeeping bodies for 'accountancy' training.

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By Cheshire
20th Aug 2018 15:34

tljenkin007 wrote:

£10k consultancy bill offset by self-employed allowable apportioned work from home costs

Thank you

Interested to know more about this one.

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Replying to Cheshire:
Red Leader
By Red Leader
20th Aug 2018 17:21

Me too.

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By Ian Lawrence
21st Aug 2018 13:38

If he has any adult children living at home he could appoint them as a director and pay them £700 per month and collect £650 in rent under the rent-a-room scheme.

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By Ian Lawrence
21st Aug 2018 13:38

If he has any adult children living at home he could appoint them as a director and pay them £700 per month and collect £650 in rent under the rent-a-room scheme.

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Replying to Ian Lawrence:
paddle steamer
By DJKL
21st Aug 2018 14:42

Not very tax deductible by company and the other two shareholders (and presumably directors) might have something to say about the idea.

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Replying to DJKL:
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By Ian Lawrence
21st Aug 2018 14:56

Yes I agree the other directors might have something to say. But they may have spouses and adult children too who could be appointed as directors. I don't understand why you are not happy that the £700 would not be deductible for corporation tax as it is a payment to a director for holding office and in my view not excessive for the responsibility held..

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Replying to Ian Lawrence:
paddle steamer
By DJKL
21st Aug 2018 15:30

Providing they perform the duties of a director and can be seen to so perform no issues, but will they?

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