Saturday, 6 June 2009

The ethics of the low-salary high-dividend route

As I wrote in a comment on Richard Murphy's blog last week, my own personal jury is still out on how ethical it is for small limited companies to pay their owner-directors a salary equal to, or just over, the personal allowance, and the rest of their remuneration in dividends.

This is of course perfectly legal. It rewards the owner-director for both the work they do (salary) and the risks they run in owning the business (dividends), and who's to say how much the individual should receive for each. And it's highly tax-efficient, because there'll be little if any PAYE and NIC due on the salary, and even though dividends come out of post-corporation-tax profit, there's no NIC on them, of either kind.

And I have to admit, in all honesty, that I do it.

But I can't help a feeling in my stomach that while this complies with the letter of the law, it doesn't comply with the spirit of the law? Is this how the system is designed to operate? Were small companies, and their directors, really meant to pay so little tax and NIC?

Richard suggests that small businesses should be run as LLPs rather than Ltds, so that the low-salary high-dividend route is closed. But that's not an option for one-person businesses like mine. To start an LLP you'd need a business partner.

The only other option, if you're in business alone, is to be a sole trader, in which case you lose the protection of limited liability. There's no such thing as a LLST.

Part of me says that if the Treasury felt that low-salary high-dividend was a real problem, they would close the loophole by extending National Minimum Wage legislation to all company directors, or putting NIC on dividends from close companies.

After all, the situation has been on-going ever since the 0% tax rate on all small company profits under £10,000 was introduced in April 2002, just before I sat my finals. Dozens, hundreds, of small businesses incorporated to save tax. And even though the 0% tax rate is a thing of the past since April 2006, over three years ago, there's still a distinct tax advantage to trading through a limited company, because there's no NIC on dividend income.

For me this is a real ethical conundrum. I'd be interested to hear what others think of it.


  1. M

    I dealt with this issue here, and know the Treasury have read this, with care, and some liked it.

    As for the LLP issue: your company could be the partner. That would give it a continuing purpose. Allocate it £15 of income, just enough to cover its annual filing fee, and no tax is due and all is hunky dory.

    I think it's time this issue got higher up the political agenda, and I'm hoping it will be adopted by at least one political party for the next general election as a real issue of concern


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