Pictured: David Ellis
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.
Higgs & Sons operate from two offices in Brierley Hill and
Kingswinford and is the Birmingham Law Society's Law Firm of the
Year 2011.