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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4203
Experience:  FCCA FCMA CGMA ACIS
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Advising on the most tax efficient manner to pay out

Customer Question

Advising on the most tax efficient manner for us to pay out £60000 to one of our Directors who has recently stepped down from the day to day involvement in our company and will become a non executive director in the company. ( We have a signed negotiated agreement)
The Director had been away from work for considerable periods of time due to illness since 2008. He has not been paid by the company since Jan 2013. (Prior to that he had been paid in full) He would step down from the day to day involvement in our company and will become an unpaid non executive director in the company. He holds more than 25%i shares in the company. He has been working for the company for approx 25 years.
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.

Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question.

Well, this is redundancy pay [maybe] so the first 30K is tax free in the recipient's hands. However the following comment from ndirect is of importance:

'Directors and other office holders may be employees if they work under a contract of employment. They will not qualify if they do not work under a contract of employment.'

From the tenor of your question it would appear possible that he was a working director under such a contract in which case a redundancy situation could be deemed to be created. HMRC may well look very carefully into the circumstances of this payment if the redundancy route is the preferred option, but that is his problem.

Unfortunately this is a classic case of Benjamin Franklin's dictum that in life there are but two certainties, death and taxes! However we would appear to have reduced his liability to income tax at his marginal rate on 30K which, assuming he has no other source of income, would leave him liable to 20% tax on 30K - 10.6K [personal allowance] = 3.88K tax due. This could be reduced by means of staggered payments over tax years to reduce his personal liability, but it really depends on the individual's exact personal tax position upon which the question is naturally silent, not to mention their own personal preference.

As far as the company is concerned the full 60K would be allowable against Corporation Tax in the tax year of distribution.

Should this not be acceptable as a redundancy then the solution would be staggered payments spread over a number of tax years.

I do hope that I have shed some light on this particular problem for you.

bigduckontax and other Tax Specialists are ready to help you
Expert:  bigduckontax replied 2 years ago.
Thank you for your excellent support.