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?

@permana a furloughed worker needs to sign to say they are in agreement of being furloughed. Dh has signed his and I’m waiting for mine to sign. This states that your employer has explained furlough and what it means to you and that you agree.

So I feel a boss is claiming then it’s fraud as they gp have fun fraudulently signed as the employee.

It’s usually compensated for by a higher income

Usually? For a large number of small businesses it isn’t, and certainly not in this climate.

Deathgrip good explanation, my reasons are caring too, if I'd been able to stay in my executive level job I would probably be earning double, yet I work harder now and I'm more anxious, research shows that people who are self employed or run a business experience more stress and anxiety.

I do think it would be good to teach this in schools. I sometimes do workshops with sixth formers, and when I ask them whether anyone has talked to them about starting a business, there's only ever four at most out of a class of 25-30 who say yes. I think there are a lot of misconceptions.

I would quite happily swap the £400 in corporation tax that a PP mentioned for a 5% employers contribution to my pension!

@coconuttelegraph @Chewbecca because their business has dropped to the point they can't pay staff and struggling to cover bills, they are Opticians, so they have still lost a massive amount of income, it's definitely not business as usual

@MagratsDanglyCharms optical industry? A lot of practices seem to be having the same issue, it's not as straightforward as retail or full medical and still very risky with the close contact!

The better comparison would be somebody whose company pulls in £28k per year compared to somebody whose headline salary is £28k per year.

If you made that comparison, those with a limited company would be even worse. If the company “pulls in” (I assume you mean turnover?) then the costs of running their business would be deducted before profit is calculated. Profit may then be say £23k a year (as an estimate - if you sell products rather than provide a service costs would be far higher, so they could take £8500 salary, £14500 dividends. Pay corporation tax on £14500 (£2755) then the dividend tax on top (637.50), so a total take home of £19607.50

Someone on PAYE of £28k would take home £22,577.64 plus the other benefits mentioned.

Some of those costs of running their business may be costs that PAYE employees have but certainly not all.

Company directors who own shares in the the business paying themselves through PAYE up to the personal allowance then taking the balance as dividends has the following effect.

It reduces the National Insurance contribution of both the company and the individual.

Employers pay employer’s national insurance contributions.

There is no National Insurance contribution due on dividends as they are distributions of profit to shareholders.

Whilst the savings aren’t what they were there is still a tax saving meaning less tax paying for public services.

Also, if shareholders qualify for entrepreneurs relief they were also paying 10% on the majority of the gains when they sold their shares.

There are arguments for and against assistance in these circumstances.

• It reduces the National Insurance contribution of both the company and the individual.

Employers pay employer’s national insurance contributions.*

Lots of are employers or we subcontract. We create wealth that wouldn't exist without us and us, our employees and our customers pay tax of various kinds, which contributes to the economy overall. Most of us are probably creating more money for the public purse through our enterprise than the average person on PAYE who might just pay a bit more in NI. If we weren't here GDP would decrease and the economy would shrink and there would be fewer people contributing. It's not in anyone's interest for us to go under.

@MamaGee09 ok, I didn't know that.

If your parents were smart enough to do this in order to maximise their income, then surely they can figure this out (or pay their accountant to do so). People who do this should be putting aside the extra money for a rainy day (like this). Hard to feel sympathy.

PAYE employees are increasingly unlikely to get anything other than statutory sick pay these days.

There used to be a big financial benefit due to the historic taxation on dividends but this has changed in the past 3 years and the benefit is negligible for many people- indeed at some income levels there is no benefit as there are costs to running a limited company . The difference tends to be NI which you only pay on income and not dividends.

Iamthewombat the rules on expenses are much, much more restrictive now. Gone are the days of putting anything through eg DH was advised by his accountant that whilst coffee could be put through as deductible for a meeting, sandwiches could not. So many people on MN seem to view anyone running a company and being paid in dividends as thieving tax evaders. When the reality is that they are taking risks and building businesses that hopefully lead to increased employment for others not willing or able to do the same. It isn’t an easy path to take!

You forgot the perks.
Cars on lease.
Brand New Mobiles on contracts .
Laptops as company assets.
Petrol free.
These things all add up now as payable buisness expenses, with no buisness income.
Normal employees didn't get these perks.

So many people on MN seem to view anyone running a company and being paid in dividends as thieving tax evaders

And rich, I wish! Some people seem wedded to their version even if it's a long way from reality regardless of what those of us who are self employed or company directors say, what can you do?

Ot only works if they make enough profit to pay the dividend otherwise any dividend which takes the company balance sheet into the red is illegal and could have to be repaid.
Unless they have built up lots of distributable profits many directors need to thing seriously about putting their full salary thro the books for a bit with the economic slump that's coming

Cars on lease. - nope, just mileage allowance
Brand New Mobiles on contracts - nope, works out more expensive than a personal account
Laptops as company assets - this is true but I also have a more sophisticated one than I would have bought for personal use, and a separate screen and keyboard, £600 of ergonomic chair and desk for back problems, about £2,000 in software subscriptions to do my job etc. etc.
Petrol free. Only for work things, I don't have the cost of commuting, but then I used to cycle to work so didn't before either.

Normal employees didn't get these perks but they do get pension contributions, holiday pay, sick pay (even if just SSP), don't have to buy all their own stationery, training, insurance, accountants etc. so it's swings and roundabouts.

Facts
We still pay:
NI
Corp tax of 19% on all profit
7.5% on dividends up to £34.5k (except the first £2k)
32.5% on dividends over that.

Oh and add to that the fact we get no sick pay, holiday pay, pension allowance, maternity pay or any other benefits. We usually have to pay an accountant, companies house fees, insurances, data protection fees (I can’t remember what these are called).
Just putting some facts around this. It’s not like it used to be.

I know a fair few business owners who run lots of their household expenses through their companies, it's very common.
It's also very common to run and business and work really hard and struggle for money and not tax dodge.
We have both in this society and lots in-between.
Only this morning a person I know was worried because usually her partner works cash in hand for the majority of his small business - which will make claiming for gov support tricky you can't have it both ways.

Ps can all these business owners stop assuming salaried workers get big companies pensions & sick pay. I don't, and nor do a lot of people.

Ps can all these business owners stop assuming salaried workers get big companies pensions & sick pay. I don't, and nor do a lot of people.

So why aren't you self-employed if it's so great?

TabbyStar-because it wouldn’t be legal?!

Fortunately the loopholes for reducing tax bill by paying yourself dividends have been tightened up, but people still choose to do it to minimise NIC ant tax. If you’ve minimised what you paid in, then how can you expect to maximise what you get out?

Fortunately the loopholes for reducing tax bill by paying yourself dividends have been tightened up, but people still choose to do it to minimise NIC ant tax. If you’ve minimised what you paid in, then how can you expect to maximise what you get out?

Can anyone me an example of when you've paid more tax than you are liable for?

The tax rate for a PAYE employee is higher than you pay for dividends.

Also don't forget often husband and wife are both on the books so splitting the money between them and taking full advantage of all the personal allowances available to both of them.

Also can then claim CB as well assuming they're not over the threshold.

If it wasn't so lucrative to be self employed why have all the contractors been up in arms about the changes to IR35?