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David Ellis  

Partner, Head of Insolvency

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Lawyer tells local directors to pay more tax

 

Article date:  23/11/2011

One of the region's leading insolvency lawyers says that local directors are unwittingly accepting significant personal liabilities as a result of their efforts to reduce tax bills.

David Ellis, head of Higgs & Sons' insolvency team says that directors are drawing a dividend instead of a salary to pay less tax, but this could land them with a bigger loss, should the business fail.

"Most family companies are effectively owned by their directors," explains David.

"As a result, when the owners wish to withdraw money from the company, they often have a choice of ways in which to do so.  They can draw a salary from the company, however, many are unwilling to do so as this will be taxed as earned income and they will pay income tax as well as employees' national insurance contributions.  The company will also bear employers' national insurance."

If, however,  directors choose to draw their payment by way of dividend in respect of their shares in the company then, as investment income, the payment will not attract national insurance (whether employer or employee) and thus offer a potential tax saving.

David said: "The decision as to how to draw their money often seems like a no brainer at the time, as no one wants to pay tax if they can lawfully avoid it.  There are, however, two problems with this.  First a dividend can only be paid if the company has sufficient distributable reserves and secondly, if the company becomes insolvent within two years then a liquidator has a far higher chance of clawing back a dividend payment than he would have if the payment had been made by way of salary."

No director can be sure of what will happen to his company in the future. David concludes: "In my opinion, with many directors, it makes sense to draw their income as salary and pay the extra tax rather than minimising tax but putting the whole payment at risk. The role of our team is to offer guidance to directors to help them understand the risks they are accepting and their full range of their duties. 

To find out how David and his team can support you, contact 01384 327121.

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