Tier 1 Extension- Income from Ltd Co.

[kans75]

Hi All,
I am employed and also a director of Limited Company, where I take only dividends every quarter and not any salary. My main income is quite sufficient with the dividends and there is no requirement of any salary.
However, in the guidance notes, It states about getting salary and dividends together and no mention of the dividend only scenario. I understand dividends needs to be supported by dividend vouchers and accountant letter.

My queries:

1. Is it compulsory that the director should receive salary every month from their own company with salary slips?
2. Can they receive only dividends without salary?
3. If the arrears in salary for last year(2010) paid in the current year, Can that be accounted towards this year's income?


All your replies will be of great help.

Regards
K

[Sushil-ACCA]

Hi All,
I am employed and also a director of Limited Company, where I take only dividends every quarter and not any salary. My main income is quite sufficient with the dividends and there is no requirement of any salary.
However, in the guidance notes, It states about getting salary and dividends together and no mention of the dividend only scenario. I understand dividends needs to be supported by dividend vouchers and accountant letter.

My queries:

1. Is it compulsory that the director should receive salary every month from their own company with salary slips?

no

2. Can they receive only dividends without salary?

yes ,

3. If the arrears in salary for last year(2010) paid in the current year, Can that be accounted towards this year's income?

hard to prove but possible

All your replies will be of great help.

Regards
K

[John]

kan75, why are you taking no salary? I suspect that you are increasing the overall tax liability totally unnecessarily.

[kans75]

kan75, why are you taking no salary? I suspect that you are increasing the overall tax liability totally unnecessarily.

Hi

As the earnings from my first job is quite sufficient and do not need require any salary paid from my Ltd co., it was advised by my accountant to show only dividends.

Am i doing right?

Regds
K

[John]

Well in my opinion, no. This is assuming, as I suspect, that your "first job" and your company are not in connected ownership.

If I were you I would be taking the maximum salary that does not attract any NI contribution, either from you or your company. In this tax year this mean salary at the rate of no more than £136 per week.

Your company will get a deduction for that salary in its tax computation, its taxable profit will be less, meaning its Corporation Tax liability will be less.

[kans75]

Hi John
Thanks for your reply. I got only limited knowledge in tax related matters as that is not my expertise
I approached an accountant(FCCA) who are meant to be expert in this subject and this is what i advised to.

Is there any other reason you think he would have advised this way?
I don't want to sound awkward challenging his forte of accounting knowledge.

What do you suggest?

Regds
K

[AccountantMatthew]

This will be one of the many accounting and tax answers that start with, "It depends" kans75.

If, as John says, you haven't had any other job since April 6th this year or no other form of income that is likely to take you into the higher rate tax bracket then it is usually a good idea to take some salary from the company and 'top it up' with dividends. Salary will be a deduction against Corporation Tax; dividends are an appropriation of profit - so won't.

If you have had a salary from another job or company of yours then this salary level is usually better off being reduced if you are trying to be as tax efficient as possible. If you are likely to have another source of income that takes your total income to just over £42k this year then dividends may well be preferable. This is because the tax rates change when you go into the higher bracket so whilst you would save some Corporation Tax in this instance, you would end up suffering more tax as an individual in the form of PAYE. The tax rate for dividends is lower than for salary so that's maybe why you have been advised as you have.

Anyway to cut a long post short, I don't know what your income position is so won't try and advise. If you are confused though then just ask your accountant to explain your salary planning to you. So long as you're not trying to tell him/her that you think you know more than them on their own subject, I can't see how offence can be taken. I'm quite happy to explain things like this to my clients as it means that it's likely to lead to fewer questions and less panic down the line.

[ilrtier1]

kans75,
I also didn't pay my salary intially. Then I paid altogether. But the only problem is how to show the salary slips and bank statement together as the dates wont match. Salary slips would show the salary for the month and date of payment normally the end date of the month. If this is the case, then dates would not match. I haven't got a solution, as my case is like this.

Secondly,
I started working for another company as employee. So stopped my own company salary slips, and going to issue a P45 to myself. So I would be drawing only dividends(not any salary from my company) and still being director. But I would be getting salary from my current employer. (Some what similar to your case). I dont think this would create any problem.

[kans75]

This will be one of the many accounting and tax answers that start with, "It depends" kans75.

If, as John says, you haven't had any other job since April 6th this year or no other form of income that is likely to take you into the higher rate tax bracket then it is usually a good idea to take some salary from the company and 'top it up' with dividends. Salary will be a deduction against Corporation Tax; dividends are an appropriation of profit - so won't.

If you have had a salary from another job or company of yours then this salary level is usually better off being reduced if you are trying to be as tax efficient as possible. If you are likely to have another source of income that takes your total income to just over £42k this year then dividends may well be preferable. This is because the tax rates change when you go into the higher bracket so whilst you would save some Corporation Tax in this instance, you would end up suffering more tax as an individual in the form of PAYE. The tax rate for dividends is lower than for salary so that's maybe why you have been advised as you have.

Anyway to cut a long post short, I don't know what your income position is so won't try and advise. If you are confused though then just ask your accountant to explain your salary planning to you. So long as you're not trying to tell him/her that you think you know more than them on their own subject, I can't see how offence can be taken. I'm quite happy to explain things like this to my clients as it means that it's likely to lead to fewer questions and less panic down the line.

Hi Matthew
Thanks for your input. Here are my inI am already employed in the first company and manage to get 27k+

[kans75]

This will be one of the many accounting and tax answers that start with, "It depends" kans75.

If, as John says, you haven't had any other job since April 6th this year or no other form of income that is likely to take you into the higher rate tax bracket then it is usually a good idea to take some salary from the company and 'top it up' with dividends. Salary will be a deduction against Corporation Tax; dividends are an appropriation of profit - so won't.

If you have had a salary from another job or company of yours then this salary level is usually better off being reduced if you are trying to be as tax efficient as possible. If you are likely to have another source of income that takes your total income to just over £42k this year then dividends may well be preferable. This is because the tax rates change when you go into the higher bracket so whilst you would save some Corporation Tax in this instance, you would end up suffering more tax as an individual in the form of PAYE. The tax rate for dividends is lower than for salary so that's maybe why you have been advised as you have.

Anyway to cut a long post short, I don't know what your income position is so won't try and advise. If you are confused though then just ask your accountant to explain your salary planning to you. So long as you're not trying to tell him/her that you think you know more than them on their own subject, I can't see how offence can be taken. I'm quite happy to explain things like this to my clients as it means that it's likely to lead to fewer questions and less panic down the line.

Hi Matthew
Thanks for your input. I am already employed in the first company and earn around 26k and projected income through my Ltd. co is about 10k.

I have explained the above situation clearly to my accountant who has advised the dividend option. My intention has never been to be offensive but am trying to work out the best option to save some money in tax and explore different opinions.

[John]

OK, on that sort of income there is basically nothing in it as regards taxation.

However if you want to maximise your income for visa purposes, your gross income will be slightly higher if you take the sort of salary I indicated earlier, and after reserving for Corporation Tax on the profit that is left, taking the rest as dividends.

Technically this is because of the difference between the 20% tax rate, and the Tax Credit on the dividend being just one-ninth of the dividend.

[kans75]

Hi John
Dividends were declared and already paid in the last quarter.
Is there any way to revert back that entry and get paid that as salary?

[John]

No, do not revert back what has already happened, but just pay a bit more salary income in the future.

As a Director of the company you have an annual pay period, so there are no NI implications on doing a catch up.

[kans75]

No, do not revert back what has already happened, but just pay a bit more salary income in the future.

As a Director of the company you have an annual pay period, so there are no NI implications on doing a catch up.

Hi John
I spoke to my accountant today and he advise me to take only dividends as the personal allowance is already taken from my first job. Also, he said there is no need to pay NI contribution when receiving earnings as dividends only.

I also showed him the payslip for 1 month where i got arrears of last year's sum of 400 pounds. However, there is no mention of "arrears" word in the pay slip. It was stated as "pay lumpsum award" with 2 basic pay entries. He said it should be no problem as i m still paying tax for that amount.
Can that amount be really included for current year's earnings as i doubt due to the fact it was deemed to be earned in previous year?

Is there a chance for HO to refuse those earnings?

Your suggestions...

[John]

If you read my post .... Tue Sep 06, 2011 9:12 pm .... you will see that I said there was nothing in it as regards taxation. But by taking salary and less dividends your income for visa purposes will be slightly higher.

[kans75]

If you read my post .... Tue Sep 06, 2011 9:12 pm .... you will see that I said there was nothing in it as regards taxation. But by taking salary and less dividends your income for visa purposes will be slightly higher.

Hi John,
Thanks for your reply. I was told that, i can receive only dividends every quarter instead of salary as there could be no allowance used as its already accounted in my first job.

In simpler words, total earnings of 33k(27k-1st job, 6k-dividends only), computed corporation tax was 1200 pounds(20% on 6k) as mentioned by him. You feel that there could be no tax but it appears vice versa.

[John]

You feel that there could be no tax

I have not said that at all. I have said they is nothing in it, meaning the there is no difference in the tax payable whether you take salary or not.

I was told that, i can receive only dividends every quarter instead of salary as there could be no allowance used as its already accounted in my first job.

That makes no sense to me at all.

total earnings of 33k(27k-1st job, 6k-dividends only), computed corporation tax was 1200 pounds(20% on 6k) as mentioned by him.

If the company made £6k profit, and paid £1.2k Corporation Tax on that profit, leaving £4.8k, how can the company pay £6k in dividends?

[kans75]

Quote:
You feel that there could be no tax

I have not said that at all. I have said they is nothing in it, meaning the there is no difference in the tax payable whether you take salary or not.

You reply on :
Posted: Tue Sep 06, 2011 8:12 pm Post subject:
OK, on that sort of income there is basically nothing in it as regards taxation.

That's why i was wondering how could be there be nil taxation.


Quote:
I was told that, i can receive only dividends every quarter instead of salary as there could be no allowance used as its already accounted in my first job.

That makes no sense to me at all.

I also could not understand why he said and that's reason behind all my postings on this subject to know if anyone had similar experience.

Quote:
total earnings of 33k(27k-1st job, 6k-dividends only), computed corporation tax was 1200 pounds(20% on 6k) as mentioned by him.


If the company made £6k profit, and paid £1.2k Corporation Tax on that profit, leaving £4.8k, how can the company pay £6k in dividends?

As my income requirement is only 6k, i was advised to show dividends without taking salary. Not sure what prompted him to advise this route.

He worked out corpn tax on my total income of 6k as £1.2k. I also gone through some notes on dividends and it states that corpn tax is calculated before declaring dividends and there should be sufficient income left after corpn tax to declare dividends.(income-expenses-corpn tax=taxable profit)

I am totally confused and stuck. I think i have to collect more information and gonna meet him again and need some workable solution.

Could you suggest how much money should be in business a/c approx. to declare 6k dividends which is paid quarterly ?

Advance thanks.

[Sushil-ACCA]

Quote:
You feel that there could be no tax

I have not said that at all. I have said they is nothing in it, meaning the there is no difference in the tax payable whether you take salary or not.

You reply on :
Posted: Tue Sep 06, 2011 8:12 pm Post subject:
OK, on that sort of income there is basically nothing in it as regards taxation.

That's why i was wondering how could be there be nil taxation.


Quote:
I was told that, i can receive only dividends every quarter instead of salary as there could be no allowance used as its already accounted in my first job.

That makes no sense to me at all.

I also could not understand why he said and that's reason behind all my postings on this subject to know if anyone had similar experience.

Quote:
total earnings of 33k(27k-1st job, 6k-dividends only), computed corporation tax was 1200 pounds(20% on 6k) as mentioned by him.


If the company made £6k profit, and paid £1.2k Corporation Tax on that profit, leaving £4.8k, how can the company pay £6k in dividends?

As my income requirement is only 6k, i was advised to show dividends without taking salary. Not sure what prompted him to advise this route.

He worked out corpn tax on my total income of 6k as £1.2k. I also gone through some notes on dividends and it states that corpn tax is calculated before declaring dividends and there should be sufficient income left after corpn tax to declare dividends.(income-expenses-corpn tax=taxable profit)

I am totally confused and stuck. I think i have to collect more information and gonna meet him again and need some workable solution.

Could you suggest how much money should be in business a/c approx. to declare 6k dividends which is paid quarterly ?

Advance thanks.

AS PER HO guidelines profit before tax is considered for threshold , u r fine

in real world dividend r paid after tax , HO has given exception to this in calculating threshold earnings

[kans75]

Hi Sushil
Thank you very much for your reply. I was going thru the tier 1 general guidance notes but could not find anything relevant to the gross or net dividends to be taken into consideration.

Page no.27, para 5 states about dividends which are normally paid from profits. I think there should be some exceptions..

Could you post the link of the threshold earnings regarding dividends?

Many thanks.

[AccountantMatthew]

Dividends are paid from distributable reserves and you can declare whatever dividend you wish so long as you do not exceed these distributable reserves.

In your case, the level of distributable reserves will most likely just be an accumulation of your retained profits - so profits from this year and all previous years; of course whenever you take a dividend then these retained profits will reduce.

I think you are correct in just going back to your accountant if you are getting confused. He or she will be in the best place to understand your situation and answer your questions.

[kans75]

Hi
I had my salary arrears for 2010 received in 2011. The total salary for that month has significantly gone doubled(as the arrears also was paid that month).

Does the HO take earnings into consideration or does it classify that as previous year's income?

Can anyone please clarifiy?

Regards
K