Giles Mooney and Tim Good discuss two Any Answers posts on whether you have to pay a small salary and how capital gains tax impacts on the calculation.
Kicking off a new ‘Any Answers Answered’ video series on AccountingWEB, the TAXtv hosts cast some light on tax-related queries raised online every month.
This month the first question came from A E Scott who asked a question which was fundamentally about setting up a business and whether they had to pay a small salary.
Mooney said that while we’re so used to paying small salary and high dividend, there may be some situations where you don’t actually want to pay a small salary.
The question is: Do you have to pay a small salary?
This leads onto another question posted by girlofwight who asked how capital gains tax would impact on the calculation, either 18% or 28%, and how that fits into the overall computation.
Watch the video below to find out more.
For the latest episode of TAXtv visit PTP Interactive. TAXtv is a monthly tax update programme available as an annual subscription from £199, (11 issues plus special editions) to view online, download from the internet or watch on DVD.
Business and finance journalist
The questions and answers were posed so clearly by Giles and Tim. Thank you - although the dividend and interest allowance are something we accountants all should know as a matter of course, I need constant repetition to get through to my dim brain.
I like the whole style, and think this spot will be very popular. Congratulations to the Aweb team for a really good innovation!
4 minutes and 39 seconds in, Tim Good advises that we should "allocate allowances and rate bands in that prescribed order", which is to say non-savings, savings, dividends etc.
I agree with the rate bands allocation, and maybe in most cases the allowances, but not always in the latter.
Say you have £8K salary, £800 Interest, £20K dividends
I would want to allocate £8K PA to the salary, 3K PA to the dividends and nothing to the interest.
Or is that wrong?
Even swap it around, and say £20K salary, £2K interest, £8K dividends, and next year you have £11K trading losses carried back 1 year and relieved against total income. I would want £9K of the losses to go against the salary £1K against the savings and £1K against the divis. There will be no tax on the remaining £1K interest anyway.
With kind regards
I agree with you Clint on all counts. The order and direction of set off of reliefs and allowances are determined by s.23 - s.27 ITA. Unless otherwise specified they can, for individuals be allocated ".....in the way which will result in the greatest reduction in the taxpayer's liability to income tax" - s.25.
To be fair to TG and GM they are giving a simplified view what is a fiddly bit of legislation. Most of us know the order of set off, but trying to identify where that fits in with the rules prescribed at s.23 et seq isn't always easy.
Allocation of personal allowances
I agree with Clint and Tony - a good example is £6,000 of interest and £20,000 dividends in 2016-17 with no other income. Allocate the PA to the dividends rather than the interest and the tax will be just £300. My spreadsheet at https://www.dropbox.com/s/t16j0gm621ttcdr/Taxpert3.2.2demo.xlsm?dl=0 calculates correctly!
Really clear, concise discussion - am sure this will be a popular slot. Of necessity it was simplified as discussed in the posts above but it gave a basic idea of how the new rules fit together which we can then take away with us, and also use this framework to explain to clients about the new rules.
No Salary Only Dividend
Several times on Aweb, contributors have cautioned against 'no salary / dividend only', (PA / IR35 matters aside) where there is a risk that the dividend will be said, by HMRC, to be a salary.
Is this fear, folklore, case law or legislation?
None of the above
In a plain vanilla situation e.g. close trading company distributing profits to ordinary shareholders, it is nonsense to suggest that HMRC could attack the arrangement on the grounds of it being salary. I don't think HMRC would consider it.