Can I take dividends instead of a PAYE salary?

Question

I have set up a UK Limited Company and need to start paying myself a salary from the Company.

Is it more convenient for tax purposes to pay myself through Company profits instead of a PAYE deductible salary?

Also - can someone inform me as to what qualifies as 'Company profits'?

I have two investors in my Co. and haven't won any business yet - can I use the money invested by shareholders to pay my dividends - can that money qualify as Co. profits?

Answer 1

Your accountant can help you with this.  

Depending on your circumstances, you may want to look at paying a salary of £5435 this year (which protects your NI contribution history) and dividends for the rest - provided you have available profits to distribute. Directors without a contract of service do not have to fulfil the minimum wage legislation.

Are there any reasons why they wouldn’t be using dividends? Occasionally there are…

 If your company hasn’t made enough profits since it started to cover

the dividends that you want to pay, then Company Law prevents

dividends being paid.

 If you want to pay a lot into pensions you used to need a salary high

enough to justify the contribution, but that is no longer is a restriction for most pension schemes.

 You believe you can only have a dividend once a year and you need

your money every month. This isn’t true. There is no set interval for

dividend payments prescribed by law. Quarterly payments are

recommended but if you need monthly cash, that can be done.

 You may not want to pay dividends because you have other

shareholders that would need paying as well. You can look to get

around this by using different classes of shares for different shareholders.

 Paying dividends may increase the value of the company for Capital

Gains or Inheritance Tax consequences in the future.

 You’re worried about the minimum wage legislation and believe you

have to pay a salary to cover this. As far as working directors are concerned who don’t have an explicit contract of employment, they are not subject to minimum wage legislation, so dont give them one.

You need to know you have enough retained profits to be able to pay

the dividends by law. Retained profits are all profits since the company

started that haven’t already been paid out as dividends. If you produce

monthly management accounts, that’ll be easy. If not, you need to be able to justify by some other method whether you have enough profits or not. So long as you reasonably believed there to be enough retained profits, that’s OK.

You cant issue dividends out of share capital or other reserves.

There are a number of reports (free) explaining this on my website.

Answer 2

You need to pay yourself a salary under PAYE; usually minimum wage in these sort of arrangements, and then the remainder of your profits can be distributed quarterly as dividends.

I stress the quarterly because it may be an issue when budgeting cash flow; also, please note your S2P pension requirements will be different when you are a limited company.  If you try to pay yourself dividends monthly HMRC will not be pleased and may class it as salary.

Answer 3

Share-holder capital cannot be assumed to be profits.  Money earned on share-holder capital (by investing the money say), can be called profit (the company is effectively trading as an investment vehicle or investment trust).

You can buy back shares from the investors at an agreed price.  This would make the nominal share-capital remain the same, but would create a negative share premium account if the share price agreed was less than originally invested.  

This would have the same effect as removing money via dividends and instead of a PAYE salary, it would may be tax efficient depending on the tax regime and rates at the time.  You should also consider national insurance payments, and in particular the state pension contributions.

IR35 may call this company's legality into question, however if it is small the inland revenue would probably assume you were just a time waster.

Answer 4

Presumably you can only pay dividends out of profit not capital. You usually pay  a wage (I don't think you need PAYE (just call it drawings) just under the NI threshold. Also you should be paying NI contributions, but you can apply for exemption under small earnings from business.

Answer 5

no you cant