Dividends

[Soir]

Morning All.

Current situation - 2 operating directors and 3rd director who is a slient partner.
The 2 operating directors are paid a low basic if around 30k each pa. Now the most efficient way is to pay each one £6k PAYE and the rest in dividends.

However, because all 3 people are equal shareholders - it means that if we pay 2 (operating ones) dividends then we have to pay the third one the same. (we don't want 3rd person to get this as it's a wage)

Is there anyway to pay 2 shareholders dividends (for wages) and not a 3rd shareholer (but then the 3rd shareholder would/could still be entitled to dividends at the end of each year if there are company profits?)

Hope this makles sense and many thanks in advance.

[Don]

Form a second limited company with the two workers employed by it. Your main company can then subcontract to the second limited company your duties and whatever else. You will need to find some other work for your second company to do as well to avoid IR35. You can then PAYE and Dividend out of your second company. Downside is additional accounting fees.

[Don]

Or you could get your silent partner to waive dividend, I believe.

Get professional advice. You can achieve what you are after but you need someone properly qualified to set it up to ensure legality and tax efficiency.

[Soir]

thanks for the advice - if 3rd shareholder waive's his dividend - is he not still entitled to take it at some point?

other than that, would it be best to try & convince the silent partner to give his shares to the operating directors (so 2 people running business have 50% each) but we have a legal document stating that he would still get 3rd of the profits each year?

[Horse_Apple]

Soir said:

Morning All.

Current situation - 2 operating directors and 3rd director who is a slient partner.
The 2 operating directors are paid a low basic if around 30k each pa. Now the most efficient way is to pay each one £6k PAYE and the rest in dividends.

However, because all 3 people are equal shareholders - it means that if we pay 2 (operating ones) dividends then we have to pay the third one the same. (we don't want 3rd person to get this as it's a wage)

Is there anyway to pay 2 shareholders dividends (for wages) and not a 3rd shareholer (but then the 3rd shareholder would/could still be entitled to dividends at the end of each year if there are company profits?)

Hope this makles sense and many thanks in advance.

Very simple.

Just add a second class of shares to your company (eg B shares) and the third person has those.

You can then pay divis on the A shares but not B shares which will have their own divi structure, if any.

You can give the 2 classes all the same rights except divs, etc.

So, the two employees have A shares and the non working investor has B shares. You could also then give all investors C shares for paying out end of year profit share evenly if that is what you need to be able to do.

As far as I am aware that is the only logical manner in which to do this and very common.

[Soir]

Horse_Apple said:

Soir said:

Morning All.

Current situation - 2 operating directors and 3rd director who is a slient partner.
The 2 operating directors are paid a low basic if around 30k each pa. Now the most efficient way is to pay each one £6k PAYE and the rest in dividends.

However, because all 3 people are equal shareholders - it means that if we pay 2 (operating ones) dividends then we have to pay the third one the same. (we don't want 3rd person to get this as it's a wage)

Is there anyway to pay 2 shareholders dividends (for wages) and not a 3rd shareholer (but then the 3rd shareholder would/could still be entitled to dividends at the end of each year if there are company profits?)

Hope this makles sense and many thanks in advance.

Very simple.

Just add a second class of shares to your company (eg B shares) and the third person has those.

You can then pay divis on the A shares but not B shares which will have their own divi structure, if any.

You can give the 2 classes all the same rights except divs, etc.

So, the two employees have A shares and the non working investor has B shares. You could also then give all investors C shares for paying out end of year profit share evenly if that is what you need to be able to do.

As far as I am aware that is the only logical manner in which to do this and very common.

makes perfect sense - many thanks, will speak to our (not-so-helpful) accountant

[Olf]

You need to be careful talking about this in the terms that you are. It might go some way to explaining why your accountant is 'unhelpful'.

A divided should not be a wage and talking about it in such terms exposes you quite badly should The Man ever want to talk to you about it. I suggest for your own benefit that you use the correct terminology and stick to it.

[Eric Mc]

Why should the other individual voluntarilly give up his/her legal roght to a dividend just because the other two shareholders don't think he/she deserves it?

Fundamental changes to the way dividends are paid and the share structure of a company cannot be made without the shareholders actually meeting and agreeing these changes. If you don't follow the procedures set out in the company's Memorandum and Articles of Association or follow basic company law, you could find yourself in big trouble

Minority shareholders have rights too.

[Workshy Fop]

I've just been through a similar exercise with a corporate lawyer. After a few re-reads I think I understand you! Currently two of you take 30k wages each and three of you split the profits evenly. If you dropped your wages to 6k each then the sleeping partner would gain a third of £44k as this would be extra in the pot at the end of the year, so he'd gain 9k-ish after 40% tax and you want to alter things to take this into account. You would both gain about £7k due to the low salary, reduced NI and getting 24k of your divvy at the lower rate.
To alter this you need a shareholders agreement in place which can allocate the dividend % any way you like (if you all agree). There are several problems with this. Why would the third guy agree to this. You're offering him no benefit for being a bit dodgy with the tax man. I think you're sticking your head above the parapet dropping your wages to £6k - this will get noticed. I'd leave things as they are.

[Soir]

thanks for al;l the advice.

Essentially, 2 or the directors run the business and are paid 30k each, the other chap does not have any involvment. so say wages are £60k, after overheads whatever is left is split 3 ways. However the two guys on 30k each wish to be as efficient as possible on their current tax (I understand this is a loop-hole and goverment may change this at some point - but we may as well use this system while it is available?)

therefore we want to pay monthly divs to the 2 chaps running the company, then pay to all 3 directors at the end of the year.

Have spoken to couple of accoutnants, and conflicting messages - some say A,B,C shares are complicated and to stear clear, one said will look bad if the 3rd chap waive's the monthly dividend then takes one end of the year.

If ever highlighted to those above - can we not say that the two guys work harder for the business so therefore we wish to pay them more dividend? (would be ideal to get 3rd chap to waive)

[Olf]

Soir said:

If ever highlighted to those above - can we not say that the two guys work harder for the business so therefore we wish to pay them more dividend? (would be ideal to get 3rd chap to waive)

Sorry to be blunt but you're really not 'getting' the distinction between a wage and a dividend are you?

Payment of dividends is not a loop hole. It's a completely legal form of democratically rewarding investors for their investment in a business when the company is profiting. Which is completely and utterly different from a wage.

I would suggest that you give the two directors who are adding value a higher wage. The way you are going about it will only lead to a friendly visit from The Man.

Edited by Olf on Tuesday 29th July 09:15

[Eric Mc]

Soir said:

thanks for al;l the advice.

Essentially, 2 or the directors run the business and are paid 30k each, the other chap does not have any involvment. so say wages are £60k, after overheads whatever is left is split 3 ways. However the two guys on 30k each wish to be as efficient as possible on their current tax (I understand this is a loop-hole and goverment may change this at some point - but we may as well use this system while it is available?)

therefore we want to pay monthly divs to the 2 chaps running the company, then pay to all 3 directors at the end of the year.

Have spoken to couple of accoutnants, and conflicting messages - some say A,B,C shares are complicated and to stear clear, one said will look bad if the 3rd chap waive's the monthly dividend then takes one end of the year.

If ever highlighted to those above - can we not say that the two guys work harder for the business so therefore we wish to pay them more dividend? (would be ideal to get 3rd chap to waive)

The Revenue would cast a very beady eye on any arrangements where it is obvious that Dividends are being paid in lieu of salary. The problem for the Revenue under current rules ius that, in most cases, it isn't always that obvious that a Dividend is being used to replace a salary. That is why so many owner/managers can recompense themselves using the dividend route.

However, your situation is very blatantly an attempt to replace remuneration with dividends and the Revenue would spot it quite easilly - especially as ypou have already established a pattern of salary/dividend payments over the years. If they suddenly changed, it could act as a trigger for the Revenue to start looking a little closer at the pattern of payments to directors/shareholders.

The fundamental reason why dividends are paid is that they are a reward for the INVESTMENT in shares made by the shareholders. If dividends start to be paid on a "work effort" basis they are no longer dividends - they are remuneration.

Edited by Eric Mc on Tuesday 29th July 09:16

[Soir]

Eric Mc said:

Soir said:

thanks for al;l the advice.

Essentially, 2 or the directors run the business and are paid 30k each, the other chap does not have any involvment. so say wages are £60k, after overheads whatever is left is split 3 ways. However the two guys on 30k each wish to be as efficient as possible on their current tax (I understand this is a loop-hole and goverment may change this at some point - but we may as well use this system while it is available?)

therefore we want to pay monthly divs to the 2 chaps running the company, then pay to all 3 directors at the end of the year.

Have spoken to couple of accoutnants, and conflicting messages - some say A,B,C shares are complicated and to stear clear, one said will look bad if the 3rd chap waive's the monthly dividend then takes one end of the year.

If ever highlighted to those above - can we not say that the two guys work harder for the business so therefore we wish to pay them more dividend? (would be ideal to get 3rd chap to waive)

The Revenue would cast a very beady eye on any arrangements where it is obvious that Dividends are being paid in lieu of slaray. The problem for the REvenue under current rules ius that, in most cases, it isn't always tjhat obvious that a Dividend is being used to replace a salary. That is why so many owner/managers can recompense themselves using the dividend route.

However, your situation is very blatantly an attempt to replace remuneration with dividends and the Revenue would spot it quite easilly - especially as ypou have already established a pattern of salary/dividend payments over the years. If they suddenly changed, it could act as a trigger for the Revenue to start looking a little closer at the patter of payments to directors/shareholders.

The fundamental reason why dividends are paid is that they are a reward for the INVESTMENT in shares made by the shareholders. If dividends start to be paid on a "work effort" basis they are no longer dividends - tthey are remuneration.

We understand this Eric - however, we just want to be as tax efficient as possible - like millions of others out there. But thanks for your input.

[Olf]

Eric Mc said:

The fundamental reason why dividends are paid is that they are a reward for the INVESTMENT in shares made by the shareholders. If dividends start to be paid on a "work effort" basis they are no longer dividends - they are remuneration.

Eric. On that subject. If a shareholder is taken on as an employee. Can a greater allocation of shares be made to them as a joining incentive....?

[Eric Mc]

Being tax efficient is always a good aim. As an accountant I try to suggest tax effecient company directors'remuneration/dividend systems for my clients too. However, as you can see, there are legal and tax blocks to manipulating income and it has to be planned carefully.

Your main problem is that any attempt to somehow reduce what you are paying to the other individual is bound to cause him upset and could be problematic for the two individuals who want to pay themselves more.

[Eric Mc]

Olf said:

Eric Mc said:

The fundamental reason why dividends are paid is that they are a reward for the INVESTMENT in shares made by the shareholders. If dividends start to be paid on a "work effort" basis they are no longer dividends - they are remuneration.

Eric. On that subject. If a shareholder is taken on as an employee. Can a greater allocation of shares be made to them as a joining incentive....?

There's nothing to stop a company allocating shares to an employee. But once an individual starts receiving shares, they become a part owner of the business and they will need to be consulted when making business decisions (depending on the number of shares they have been allocated and the voting rights attached to those shares). You may not want that.

There are also the tax implications of allocating shares. This can be a tax minefield and is a very specialist area - especially if share options become part of the share distribution.

Edited by Eric Mc on Tuesday 29th July 09:35

[Soir]

Eric Mc said:

Being tax efficient is always a good aim. As an accountant I try to suggest tax effecient company directors'remuneration/dividend systems for my clients too. However, as you can see, there are legal and tax blocks to manipulating income and it has to be planned carefully.

Your main problem is that any attempt to somehow reduce what you are paying to the other individual is bound to cause him upset and could be problematic for the two individuals who want to pay themselves more.

thanks Eric - what would you suggest to do? (we cannot pay higher wages for this defeats the object of being more tax effiecient without raising overheads)

possible options(?) 1) A, B & C shares. 2) 3rd Director to waive monthly dividend. 3) 3rd shareholder to give up shares and have legal document to state they have some ownership of business and we will pay them a % above a certain amount of profit each year?

[Soir]

It looks like the A, B & C shares is the easiest/best option?

[Eric Mc]

At this point, I have to limit what I can say as you altready have a professional advisor and ethical consideration must be adhered to.

I would ask - have you maximised expense claims you might be entitled to (such as mileage claims, reimbursement due to you for out of pocket expenses etc)?

Have you looked at salary sacrifice schemes (such as child care vouchers - if appropriate)?

Is there anything that could be done on the pension front.

Would you be happy driving a van?

All of the above would allow additional remuneration type costs to be extracted from the company and paid to you as directors (as opposed to shareholders) and the company would be able to claim Corporation Tax relief on these costs (which it can't with dividends) and finally, the extra costs will not be subject to PAYE or NI.

Just some thoughts.

[Soir]

Eric Mc said:

At this point, I have to limit what I can say as you altready have a professional advisor and ethical consideration must be adhered to.

I would ask - have you maximised expense claims you might be entitled to (such as mileage claims, reimbursement due to you for out of pocket expenses etc)?

Have you looked at salary sacrifice schemes (such as child care vouchers - if appropriate)?

Is there anything that could be done on the pension front.

Would you be happy driving a van?

All of the above would allow additional remuneration type costs to be extracted from the company and paid to you as directors (as opposed to shareholders) and the company would be able to claim Corporation Tax relief on these costs (which it can't with dividends) and finally, the extra costs will not be subject to PAYE or NI.

Just some thoughts.

Hi Eric, expenses are currently maximised. No children yet for both people, wouldn't want a van
-thanks for the suggestions though. I realise you cannot confuse salary with dividend, but again really wanted to give the 2 workers better salary benefit without raising overheads.

thanks again