To ask why people think directors that take dividends are tax avoiders?

[Milo2]

Small Ltd companies are currently left out of the UK government funding. Why? The directors still have families to feed and bills to pay.

I’ve seen a few people on here rubbing their hands with glee. Saying things like ‘good it serves them right for taking dividends’.

Some have compared directors to those that avoid paying tax and it’s completely unjustified.

Am I being unreasonable to ask why there is so much hate for these directors?

Also would you be upset if you had no hot water or heating to find that your local heating engineer had gone bankrupt and couldn’t help you? If so, why would you hate them so much when all they do is work hard and pay their taxes just like everyone else?

It is when your only reasoning behind it is the fallacy we're all tax dodgers and thieves.

Can you actually point to any posts doing that? I have just seen a lot of posts saying that directors typically pay proportionately less tax so should not expect the same protection as people on PAYE. That's a logical argument, not hatred.

Also, any proposal based on rewarding directors for expected dividends would be unfair to ordinary shareholders.

Does anyone have a useful link on how directors can challenge or ask for support re this? I’ve written to my MP but it says his response can take months.
I’m a director and can’t furlough without shutting my business which I’ve worked really hard for over 20 years. I will lose my business, my home, and my rental property which was my pension. Because of the rental property I don’t qualify for UC even though it is mortgaged to the hilt.
My accountant has suggested I create as much debt as possible and then go bankrupt?!

Dividends are actually taxed at 7.5% for basic rate tax payers. And the first £2,000 is tax free.

I’m not remotely gleeful about directors struggling, but I think it is a risk they decided to take. They were given the option to pay less in tax, with the payoff being they receive less from the government in a crisis. Presumably most people who decided to take dividends over a salary accepted that the risk was worth it. If they had been really sensible about it they would have put some of the tax savings aside for a rainy day.

Income tax is not the issue.

The employer / employee NI rate is around 25%. It is this which confers social security earned benefits and this which Directors choose to opt out of by being paid dividends rather than salary. If they need the security of income protection they should pay NI or build up a contingency fund instead.

The risk with dividends that there isn't the retained profit at the end of the year. Wages get paid (under normal circumstances anyway).

I agree with the government on the stance taken as where would you draw the line? Protecting dividends for all shareholders would be terrifyingly expensive.

Dividends are actually taxed at 7.5% for basic rate tax payers. And the first £2,000 is tax free.

But corporation tax of 19% has been paid on the profits paid out as dividends.

Say, £25k profits. Corporation tax of £4750 will be paid on that £25,000 leaving £20,250 to pay as dividends. First £2k zero rate, next £18,250 at 7.5% or £1368.75. So total tax on the £25k earnings is £6,118.75 (24.475%), leaving £18,881.25 "take home" after all taxes.

So far more tax than the 7.5%!!!

If they need the security of income protection they should pay NI or build up a contingency fund instead.

Well, you can understand why we might not do that, considering the value we might get from it if you consider it "income protection". I put my details into the benefits calculator last week and it came out at zero. It doesn't know what NI I have paid. I put in the same details with

@pirateparker it would be worth speaking to another accountant to get a second point of view. It would be money well spent.

For those saying you must be a high income to afford an accountant to do your limited accounts it really isn't that expensive. It's basic filing and accounting and routine run of the mill stuff for them for smaller companies. It's not some contrived tax dodge.

an you actually point to any posts doing that? I have just seen a lot of posts saying that directors typically pay proportionately less tax so should not expect the same protection as people on PAYE. That's a logical argument, not hatred.

Except directors DON'T pay less tax, or at most, the difference is minimal. And I agree - I can't put myself on furlough because I still have to finish work and stay in touch with clients but the overall workload has gone down so frankly help from the government would be appreciated. Certainly wouldn't expect it to include dividends, but help for the salary I pay myself would go a long way.

The thing people are forgetting is that the LTD tax structures and dividends aren't really about risk, they're about incentivising people to start businesses. Small businesses are good for the economy. But the risks, even just simple ones like cash flow, mean that it can be very difficult for people to start them. Allowing flexible tax processes where, for example, tax isn't paid monthly but annually via corporate tax, is a great way to help a small business survive. The number of times I've paid myself JUST enough to cover the mortgage only and had to wait for other money until clients have paid, I can't tell you.

The employer / employee NI rate is around 25%. It is this which confers social security earned benefits and this which Directors choose to opt out of by being paid dividends rather than salary. If they need the security of income protection they should pay NI or build up a contingency fund instead.

They havn't opted out at all. If you pay a wage of £12,500, then you are paying NIC. It's over the threshold to qualify a full "credit" for state pension, maternity pay, paternity pay, and other benefits. Just like any other employee who earns more than the NIC threshold, Just like the unemployed, disabled, home carers etc who also get the NIC credit despite not paying any NIC.

What is different here, is that the government have brought in a completely new "benefit" with completely different rules as to who qualifies and what they qualify for, which as it turns out, is pretty unfair and not well thought through.

They were given the option to pay less in tax, with the payoff being they receive less from the government in a crisis.

Er, no.

I was never given the "option to pay less tax" (where do I sign?) and we have never been told that there was support "in a crisis" that we would not be able to access.

Benefits, yes. But the support in place now? Nope.

Explain how this was communicated to us? Show us where the plans to pay everyone except us were stored.

What is different here, is that the government have brought in a completely new "benefit" with completely different rules as to who qualifies and what they qualify for, which as it turns out, is pretty unfair and not well thought through.

Exactly.

If they need the security of income protection they should pay NI

Up until last week, there was no suggestion at all that paying NI gave any rights to income protection. People made decisions re wages levels (and therefore NIC) based on what the law said at the time re entitlements. You can't make an informed decision about what may or may not be announced at some future point in time!!

Except directors DON'T pay less tax, or at most, the difference is minimal.

Most do pay less tax, and for many it's significantly less - that's why there have been so many fights over IR35.

I speak as a tax lawyer.

The thing people are forgetting is that the LTD tax structures and dividends aren't really about risk, they're about incentivising people to start businesses.

Yes, and Gordon Brown changed the tax system to incentivise people to start up or convert to Limited companies. It wasn't an accident or a side effect or a loophole. He actively brought in new tax reliefs that only applied to small limited companies alongside other tax reliefs/concessions to enable people to convert sole trader businesses into limited companies. That was deliberate on his part. It caused hundreds of thousands of new limited companies to be formed over his 13 years of power. He could have granted tax reliefs and incentives to sole traders, but made a decision not to and applied them only to small limited companies. His legacy continues to this day and has contributed to the current problems re limited company directors.

Most do pay less tax, and for many it's significantly less - that's why there have been so many fights over IR35.

That's because of the double NIC whammy, not tax. They could have solved the problem by having a special NIC code for company directors, i.e. only liable to employee NIC. The answer has been staring the Treasury in the face for over 20 years and they've been advised time and time again how easy it would be, and how it would go a long way to aligning tax/nic between sole traders and limited company directors, but they're sticking their fingers in their ears and persisting with IR35 despite losing far more cases than they win.

@pirateparker I would fire your accountant, they sound pretty dodgy. You won’t be accepted for bankruptcy if you’ve been running up avoidable debts before applying.

Having had a proper read through...

Directors are usually advised to incorporate. Tax reasons do play a part but there are many other reasons. (protection if personal assets from risk should the venture fail, companies not dealing with sole traders etc). If I went self employed I would incorporate in a heartbeat. It's not just to screw the system. Anyone can do it.

The main issue is that directors aren't necessarily the shareholders and only shareholders get the dividends.

If the government supported shareholder, where do you draw the line? Do we protect dividends for FTSE 100 shareholders? Do you protect dividends for non UK tax payers? (e.g. Mrs Green of Arcadia Group).

What happens to those people who are director/shareholders of multiple companies?

Do you pay a sum regardless of profitability?

Gets horrendous very very quickly.

@vangoghsdog Yes welfare benefits are low and you get nothing if you have over £16k savings. This affects everyone, not just you.

married
Why can't we do it on just salary then? Have it the same as the self employed but only on salary and not dividends?
It would be better than what we get now which is nothing.

@vangoghsdog Yes welfare benefits are low and you get nothing if you have over £16k savings. This affects everyone, not just you.

Yes, obviously. I was not in any way disputing that.

My issue is with someone referring to it as "income protection" that is somehow purchased with NI.

It's not income protection and it's not bought with NI because even people who have never paid anything get support.