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?

Whereas what you pay in a salary can be written off as an expense so you don't pay corporation tax on that.

Yes, agreed. But it’s almost always more tax efficient to take dividends versus a salary. This is the reason that company directors do it in the vast majority of cases I’ve come across. It is a way of avoiding tax which is a legal way of paying less tax. The question asks why people think that those who take dividends are avoiding tax. Well, it’s because they are. No one’s suggesting that they’re evading tax. And there’s also the NICs angle if taking dividends versus a salary.

I just find it strange that some people want to try and justify it to the nth degree. It’s almost as if, deep down, they’re not entirely comfortable with it. Just a thought.

I know plenty of people who take dividends instead of salary. Every one of them has said before it is because it is because it is more tax efficient.

Most of them are struggling in the current circumstances, most of them do not blame the government for not bailing them out for their own choice to reduce tax through dividends. There are a couple that do blame the government or their accountant, or basically anyone but themselves for taking the risk of having a low salary in favour of dividends.

OldGranvilleHouse dont think you will find many company directors who are uncomfortable will saving a bit of tax - and quite frankly unless you earn mega bucks it is now quite a small difference
But anyone can give it a go start up your own small Ltd company
Just be prepared to accept you have to earn your own money - and suck up any losses
Wasnt expecting any help from government never have

@rosie1959 my final point in my post above was just that I can’t get my head around why some posters are so vehemently denying that taking dividends (rather than a salary) is a way of avoiding tax. It is 100% legal and fairly widespread but, nonetheless, it’s tax avoidance - which was the OP’s question. I was just wondering why they’re so much in denial about it being tax avoidance and thought maybe they felt it was wrong and/or they were uncomfortable with it. To put it another way, if someone was doing something perfectly legal and they were comfortable with it/thought it was right, why try and hide it?

You only pay 20% tax on dividends. So taking dividends is avoiding tax. QED.

For a start, there is no 20% tax on dividends.

Secondly, if you're paying the set tax rate on them, you're not avoiding tax

Thirdly on PAYE you get £12k free of any tax, then another £38k at 20% tax.

Dividends you only get £2k tax free (but the company has already paid 19% corporation tax first, so essentially it's 19% tax as the type of companies we're referring to here are often one or two person companies).

So, I dunno, maybe look up the tax rates before you comment. They're not hard to find.

Maybe this will help.

The example shown is someone paying themselves to the national insurance limit.
I actually don't do that I pay up to the tax free limit as a salary of £12500

I pay around £500 national insurance a year as an employer and about £500 a year as an employee

Therefore I pay pretty much the exact same tax as everyone else earning 30k a year!

@furrytoebean

Thanks for that, but I'm sure those posters who think directors are complaining over nothing still won't bother to educate themselves of the facts. After all, dozens of posters on here have been trying to explain, but they can't break through the wall of prejudice and half-truths, not to mention all the posters posting absolute nonsense.

Effective tax rate of 16.4% vs 28.1% is not "pretty much the same".

Agreed self-employed vs company director is very much "it depends" but employed pay more and this becomes ever more the case the more they earn.

employed pay more and this becomes ever more the case the more they earn.

And they get massively more employment rights and benefits. SSP, SMP, redundancy, better rights to unemployment benefits, paid holidays, rights against unfair dismissal - the list goes on. Stop comparing apples and pears.

It is 100% legal and fairly widespread but, nonetheless, it’s tax avoidance - which was the OP’s question

No I don’t get it either

user if any of these employee "benefits" were in any way adequate or related to contribution levels Rishi would not have needed to introduce a whole new ad hoc system. People should really research what they are actually "missing out on" before commenting although I suspect they have and have rightly concluded they are better off with the tax saving.

I know plenty of people who take dividends instead of salary. Every one of them has said before it is because it is because it is more tax efficient.

Yes, so when they've minimised their own tax contribution by wholly legal jiggery pokery, they can hardly complain when the state minimises it's support for them. Can't have it both ways.

Yes, so when they've minimised their own tax contribution by wholly legal jiggery pokery, they can hardly complain when the state minimises it's support for them. Can't have it both ways.

Except as explained multiple times and multiple ways on here, it's just not that simple.

For one thing, as many have pointed out, for some people the opportunity to earn more using a limited company means they pay more tax than they would as an employee, even allowing for the avoided bits.

For another, very few people are one thing or the other. I have had spells of employment and self employment, depending on what was available.

I have made 40+ years of NI contributions.

We don't means test all benefits, or relate all to contributions.

I don't mind the government not helping me now (ltd co director, still working) but by the same token I wish they and HMRC would fuck off to the far side of fuck trying all the time to claim I am actually a disguised employee with ever more complex expensive and labyrinthine processes to try to determine that.

OK, then, to anyone who takes dividends in an established company why........ just why?

I have had spells of employment and self employment, depending on what was available.

Same. And in the wrong way round to get any help now.

I think everybody practices tax avoidance i.e. we want to keep our salary to spend and don't put in an extra few quid for the HMRC because they're all for good causes. If it's legal that's fine it's up to the government to close the loopholes or simplify the tax regime to make it easier to follow and enforce.
It's not right that any contributors ( taxpayers ) are omitted from the current Covid help measures, they are the very people that have supported the NHS and welfare prior to the present crisis.
Taxation for all should mean bailout for all.

@saleorbouy You are wrong. Most of us are paid through paye and do not practice any kind of tax avoidance.

@alloutoffucks

No pension? No ISA? Don't make any charity donations? And various other ways of getting income without paying tax. Legally.

Oh fgs, if you live in a world where people only pay into pensions or savings, or donate to charity to avoid tax then no wonder you've got this arse- backwards.

For years, people have been treating post-tax profits from their limited companies as a perk. They haven't been treating it as income, or else they would have put it through the books as income. You can pay yourself through PAYE at any time of the year, in any quantity, if profits aren't predictable or if you want to extract the maximum from the company in any one year. But by using after-tax profit you're clearly stating that your income shouldn't be considered as a running cost to the company.

It's quite possible to run a limited company taking a regular wage, leaving extra in the company for the leaner times between contracts, taking dividends once a year as a genuine 'yay we did well' reward. I did it for years. Meant I could also pay myself SMP which as a tiny company I got back in full. Although to ensure I didn't run foul of assumptions that directors fiddle the books I did set a relative up as director while remaining the sole shareholder.

If your profit is your income, put it through the books as income.

And those saying they pay more tax through the avoidance model - a. Worked examples or it didn't happen and b. Why on earth are you still doing it then?

If it's legal that's fine it's up to the government to close the loopholes or simplify the tax regime to make it easier to follow and enforce.

100% agree with this, but it is the reverse of what happens. It's almost as if HMRC are deliberately trying to make things complex (with help from politicians of course).

How about a statutory definition of self employment (for both tax and employment rights) for a start?

if you live in a world where people only pay into pensions or savings, or donate to charity to avoid tax then no wonder you've got this arse- backwards.

Except noone said that.

Also don't forget that one person limited company directors could avoid employers NIC at one stage due to the employers allowance exemption so directors had started to pay themselves more in payroll as they only paid the employee NIC (like employees), but HMRC changed the rules to stay one person company directors couldn't use the employres allowance anymore, so they'd end up paying NIC twice (employees and employers NIC) if they paid more in wages - hence they all started reducing their wages again and went back to dividends.

There's only one group to blame for this - HMRC and the Treasury - they've failed to get a grip of the problem or come up with a solution since it became widespread back under Brown. The employers allowance was a good middle ground to help avoid the "double tax" of two lots of NIC, but some pillock within the Treasury decided to scrap it for one person companies. Clever that! (NOT!). They ended up losing out when people went back to the dividend model.

It's almost as if HMRC are deliberately trying to make things complex (with help from politicians of course).

Professional accountancy bodies and the government quango "Office of tax simplification" have both lobied for a "see through" system for small businesses where the tax/nic is the same regardless of whether they're a sole trader or limited company. HMRC/Treasury have failed to even engage with the idea let alone adopt it.

There's only one group to blame for this - HMRC and the Treasury
^This, plus the politicians (of 3 parties) who have failed to get a grip of it.