Is paying yourself a small salary and claiming dividends bad?

[lastonetime]

Please don't bite my head off, genuine question because I don't understand the system,

MIL and FIL are self employed as they've always said, they are directors of a ltd company. We've recently found out they pay themselves £800 a month and the dividends.
It seems like they won't get anything from the self employed 80% payments and only on their PAYE.

They are obviously worried about the future.
They had been advised to do it this way by their accountant, is it to avoid paying tax? Their argument is that they don't get holiday or sick so it balances out.

I've seen a lot of anger on here for people that do it that way. Just trying to understand why?

Also he pays NI so it would be nice to get something in this shit show of promises that Sunak has offered.

In layman's terms I call myself self employed as it reflects that I take my own responsibility for how much I earn in the month, and no sick or holiday.
In reality in my industry the companies that hire me to do contracts want my invoices to come from a ltd and vat registered company so that is how I am set up. But in casual conversation it's just easier to say self employed...

@RedDiamond I think that's their main dilemma, they want to stay open as key workers and the service they provide, but know they can only claim if they completely close.

I have heard some businesses doing very nicely out of this crisis - fur longing their workers so the gov pays the wages - and continuing business as normal, win win

@permana - I think there will be an awful lot of court cases and fines/penalties when this is all over. I also think that some employers do not really understand what furloughing means to be honest and that is the message the Government/HMRC will be getting over in the next few weeks when companies are allowed to apply for the grants. I think this will come as a huge shock to a lot of companies that they have to pay the employess and then claim back the 80% and whilst doing so, they will have to tick the box to say that the worker they are claiming for is NOT working in any shape, size or form.

If they are open as normal why us this an issue? The scenes are for people whose employers aren't open of the self employed who can't work not for businesses who can carry on.

If they are the only two directors in the company then only one of them can be furloughed. That person can have nothing to do with the business.

If they're key workers and continuing to trade as normal, why claim at all?

I'm a solicitor and I am being furloughed at work. They are cutting of all access to remote systems so there is no risk of us falling foul of the rules and working.

If companies lie then it is fraud. It not going to be hard to check either. Just look at someone's emails and you can see if they've been at work or not.

*off

It’s legal but a bit shady imo

There is really a lot of business illiteracy being highlighted by this situation.

Just look at someone's emails and you can see if they've been at work or not

I'm pretty sure that the unscrupulous employers asking their furloughed employers to carry on working aren't large professional firms with corporate email systems they disable. That's a rather privildged sheltered view of the world.

If they want to continue to work and are key workers (so presumably are needed) won’t their company continue to earn revenue so they will ultimately continue to receive an income via divis.

If not then they can furlough themselves on 80% of their PAYE. They have to carry out their directors duties but can’t work at all.

The way they’ve set up their income is a tax avoidance scheme. It is legal.

If they are open and keyworkers why is this an issue? Surely it's just business as usual(ish)?

my Dh is in exactly the same boat and can't afford to totally shut up shop (nor does he want to) but his business is only working at around 40% capacity and he's struggling to sell quite considerable amounts of stock - he's fine for now as he can continue paying the small income we are used to BUT we rely on the dividend payments for staged bill payments (so not just luxuries) and it will hit us hard in a couple of months. Literally no idea what we'll do

I suspect that i may be in the same business / profession as them. I also have a Ltd company but because I never really understood the dividend system very well I have paid myself a decent salary. However, I am classed as a keyworker. The job involves face to face with a client and cannot be done from 2 metres away! 80% of my clients are in self-isolating categories, and of the remaining 20% it would appear that only 4 or 5 would have wanted to come in as usual. If I furlough I get 80% salary; if I see the 4 or 5 I get 3 %. My family come first; the existence of my business is as stake.
My advice would be to find a similar business, say, 20 miles or so away, that has taken the decision to remain open, and direct those few clients to them in the short term. This is then win:win.

Posted too soon, that's not right, only companies pay corporation tax. If a person gets dividend they still have to pay tax afaik you pay slightly but not much less tax.

Corporation tax is paid on all profits, so anything you’re taking as dividends has already been taxed at 19%. You then pay tax again on the dividends you take, basic rate of 7.5%

At lower income levels it’s not a tax dodge in the slightest.

Yesterday I worked out that someone with a company profit before salary taken of £28k (average U.K. wage) would pay out £200 less than a PAYE employee on that wage, and without the benefit of sick pay, holiday, pension etc.

@blankscreen hah ha....you are only thinking of white collar/admin workings.
I am thinking of blue collar workers. I have a Masters & a good degree and am reasonably paid (higher tax bracket) and I don't use a work email at all (I don't have one) at work.
My boss could easily tick a box and claim the 80% of my wages....how could anyone check? I wouldn't even know unless I personally was written to by the HMRC.

If HMRC wrote to me at work, my boss could intercept the mail. It would have to be to my home address. Even then, how could I grass my boss up, and lose my job as we head into recession? Not going to happen.

Permana that is fraud so if you think they are I’d look into it. No one knows the mechanics yet I don’t think so hopefully they will have a method for you to see it, tax code on pay slip maybe.

Deathgrip thank you for trying to point there are no huge tax savings from having your own small limited company
Having your own company sorts out sickness there is no sick pay apart from ssp There is no holiday pay If you dont work you dont earn anything
If people think it's so great a tax benefit give it a try but you will be responsible for making your own income You take the risks involved
Many small companies employ a few people making jobs for the area We are responsible for their welfare
We can last a while but it will clear out probably every penny we have which would be fine if we were young enough to make it up Sadly we are not

Yesterday I worked out that someone with a company profit before salary taken of £28k (average U.K. wage)

That’s the point. Profit before salary taken. What’s been deducted to get to that profit? The cost of travelling to work (at 45p a mile, tax free, if driving). The cost of lunches if working at a client’s premises. Etc.

The better comparison would be somebody whose company pulls in £28k per year compared to somebody whose headline salary is £28k per year. The salaried person can’t offset their £2k season ticket against income tax. The person employed by their own limited company can, against corporation tax. That’s a saving of almost £400 in CT straight away.

...would pay out £200 less than a PAYE employee on that wage, and without the benefit of sick pay, holiday, pension etc.

That’s part of the deal when you work through your own limited company. It’s usually compensated for by a higher income. You also pay less NI when you work through a limited company, because you usually pay yourself a lower salary and take the difference as dividends.

And I have worked through my own limited company in the past, before anyone asks.

What’s been deducted to get to that profit?

Well that’s true for all self employed people isn’t it?

Yes, you can offset some costs - that’s one of the pros, stacked against a large list of cons.

If it’s such a fantastic option I wonder why more people don’t do it? (Rhetorical question, obviously).

We have a limited company - including dividends we make about £30k per year jointly. The idea that limited companies are all high earning, tax dodging shitbags is simply not realilty.

I became self employed when I was too sick to work but not sick enough to get disability benefits. DH was self employed too so we set up a limited company. We take a low salary because my earnings are so variable, then at the end of the year we take what we can on dividends. This goes straight into the directors loan so we can use it for living costs throughout the next year.

Huge numbers of self employed people are in a similar boat to me - not able to work a regular job due to illness or caring responsibilities. A significant proportion earn less than minimum wage. The public perception is not accurate.

In years past it may have been possible to dodge a lot of tax but that’s certainly not the case now. On anything over £2k of dividends we’ve paid 26.5%, more than PAYE income. If we were higher earners we would have greater benefits but we don’t.

The salaried person can’t offset their £2k season ticket against income tax. The person employed by their own limited company can, against corporation tax. That’s a saving of almost £400 in CT straight away.

You’re making assumptions on costs there - never had a season ticket while working full time, don’t have one now. Don’t meet with clients so can’t claim for travel, client lunches etc.

And actually many employees can absolutely claim expenses as part of their employment package.