CoronavirusMay 14 2020

Will the crisis cause a rethink of salary vs dividends?

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Will the crisis cause a rethink of salary vs dividends?

But for those who receive their income via dividends from their company profits they will struggle, if they want help from either of these schemes.

The CJRS is calculated by looking at Paye payments made through the Real Time Information (RTI) system. 

Furloughed employees get 80 per cent of their salary via the scheme

In order for an employee’s furlough pay to be eligible, the employee must have been on the company’s payroll and an RTI submission made for tax year 2019/20 on or before 19 March 2020. 

The salary which can be reclaimed under CJRS is calculated as 80 per cent of salary (either contractual, for fixed salaries, or average over the last 12 months/same period last year for variable pay or seasonal workers). 

The payroll must be run as normal and employees paid, with the employer then claiming back the salary from HMRC through the grant.

As many self-employed people work through their own limited company, they often pay themselves a very small salary and pay the rest in dividends – a more flexible system which can be adjusted to reflect the company’s profits. 

Paying yourself in dividends instead of increasing one's salary reduces the overall tax paid, as the tax rate on dividends is much lower than it is on a salary. 

As with all businesses the current crisis has brought about an opportunity to look at things differently and take stock.--Mark Hook

Andrew Chamberlain, director of policy at The Association of Independent Professionals and the Self-Employed (IPSE), says: “The calculation for the CJRS does not take dividend income into account, so company directors get 80 per cent of not very much under the scheme.”

The calculation is based on profits from previous years. Limited company directors are not eligible for the SEISS.

Time to think again

Andrew Timms, a partner at UHY Hacker Young, says as the CJRS only takes into account salary, this could make business owners think about the benefits of paying dividends.

Mr Timms adds: “Dividend income is not considered, so individuals who are facing furlough may find that they are receiving significantly less income than they are accustomed to. 

“No doubt this will make business owners think about the benefits of paying dividends – slightly lower tax overall, pay the tax later – against how it is counted as income. 

“The same issue can also cause problems in other areas, such as with mortgage applications where it is harder for those on dividends to prove recurring income levels.”

Gary Starmer, director at Kingston Independent financial Advisers, says Chancellor Rishi Sunak is in a "difficult" position when trying to put forward a reasonable proposition to the true self employed person, for example those paying class 4 national insurance (NI), because they are not on PAYE paying their taxes and NI month by month on a fairly fixed level of income, but are paying taxes and NI half-yearly on potentially volatile profit levels.  

Mr Starmer adds: “He has to establish an average taxable profit level over a three-year period equivalent to what a salary level for a salaried person might be. 

“This is achievable but after a complicated process which will bring delays although the benefits are potentially the same as for an employed person and backdated to 1 March. 

“Those who lose out are the newly self-employed who will have to fall back on Universal Credits and/or a Business Interruption loan.”

When the lock down is lifted and the economy does start to recover it might be time for advisers discuss how shareholder directors are going to pay themselves going forward. 

Mark Hook, a tax partner at accountants Rowleys, points out that if director shareholders are going to take more of their monthly pay as a salary then they will end up paying more income tax and national insurance, which is what the chancellor has already indicated he wants to happen.  

Mr Hook adds: “As with all businesses the current crisis has brought about an opportunity to look at things differently and take stock. HMRC is under additional pressure in some ways with the Covid 19 schemes being developed and launched.

The current crisis may bring about some change in how remuneration is paid.--Andrew Timms

“However, we believe HMRC also has an opportunity to look at the tax system overall and how it can be simplified. The system has become so complex, the cost and time to do this may put the government off.”

Mr Starmer says although many financial advisers will not have been involved in the tax/NI planning - as this would probably be more the accountant’s territory -  they will understand financial  consequences and have encouraged clients to save for the future or a rainy day through Isas and pension contributions as well as a liquid emergency funds; in bank, building society or premium bonds.

Mr Starmer adds: “A financial adviser will come into his or her own in helping their client release the capital and/or income required to get them and  their family through this difficult time.

A new approach

“I do not think that financial advisers will need to change their approach to advising clients as a result of the Coronavirus pandemic because we have always had to consider all potential financial outcomes and build in financial flexibility to our advice. 

“The potential reasons for a client`s financial difficulties, short or long term, are many and varied. This is just one more to add to the list albeit exceedingly widespread for non retired clients.”  

The government plans could also bring about a sea change in how self-employed individuals, going forward, change the way they allocate what they will get in salary and dividends.

Mr Timms says: “The current crisis may bring about some change in how remuneration is paid. Dividends benefit from no national insurance, which has made them an attractive and tax-efficient option for owners to extract profits from their business. 

“It is unlikely to cause the end of remuneration through dividends, unless there are significant changes to tax treatment, but it may result in a more equal balance between what is taken as salary and what is taken as dividends.”

Mr Starmer adds: “The Chancellor will hopefully give financial advisers more to think about when he makes changes to even out NI contributions which will concentrate the mind on less obvious means of “tax” mitigation and put greater onus on the accumulation of capital and capital profits during their working lives.”

 ima.jacksonobot@ft.com