Director/shareholders of small companies may be considering reducing their salaries and/or dividends during this uncertain period. Even if firms are managing to maintain profits or breakeven, prudence would suggest that until things improve we should do what ever we can to preserve cash reserves.
Many directors have taken the sensible option to minimise their salaries and take any balance as dividends. In this way, NIC costs can be kept to a minimum.
For those who are under the State Retirement Age there may also be a need to maintain salaries above the threshold that provides NIC credits towards a state retirement pension.
All directors that receive dividends from their company should probably aim to take a minimum dividend of £2,000 a year as this is tax-free.
If you are thinking of moving to a new house you may need to sustain your income (salary and dividends) at a realistic rate to qualify for a mortgage.
Does this mean you have no choice? That you will need to continue taking salary and dividends at pre-COVID levels even if all the cash is not required for private purposes?
Fortunately, there is a solution
HMRC will generally accept that payrolled salaries and dividends voted will be considered as taken by director/shareholders if credited to their loan accounts with the company.
These loans can then be repaid at a future date – when cashflow has eased – with no additional tax complications.
What about tax liabilities?
Director’s salaries will be subject to PAYE and therefore any income tax due should be deducted and paid by the company. The net salary is the figure that will be credited to your loan account.
Dividends are a different matter. Dividends form part of your annual self-assessment and any dividend taxes due will be payable personally by the director whether or not they actually draw the dividends from the company. Accordingly, advice should be taken to work out the amount of dividend taxes payable. The tax amount should then be withdrawn and saved to meet these future liabilities and the after tax amount transferred to the directors’ loan account with the company.
We can help
If you would like to consider your options regarding the withdrawal of salaries and or dividends from your company, please call.All news
- If you've claimed too much or not enough from the Coronavirus Job Retention Scheme »
- Calculate how much you can claim using the Coronavirus Job Retention Scheme »
- Tax Credits Manual »
- TCM0014020 - Appeal stages - Mandatory Reconsideration - initial action »
- OT60095 - Transferable Tax History - DSA estimate must be reasonable »