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bigduckontax
bigduckontax, Accountant
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Is it acceptable to pay a senior employee a dividend? The

Resolved Question:

Is it acceptable to pay a senior employee a dividend?
The employee concerned is heavily involved in the commercial management of the business, driving profits and brings with him a client bank.
The shares issues would be Income & voting B shares, with no right to equity and not be grater in value than the clients he is introducing.
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. Here is a quick summary of shares and classes from the Company Law Club: 'Most companies have only one class of shares, ordinary shares, but it is increasingly common for even very small private companies to have different share classes. This may be done for various reasons, such as to be able to vary the dividends paid to different shareholders, to create non-voting shares, shares for employees or family members, etc. A company can have what classes of shares it likes and can call any class of shares by whatever name it chooses.' So your proposal is perfectly acceptable, but the creation of the new class of shares will require shareholder approval in general meeting. I do hope that you find my reply of assistance.
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Customer: replied 1 year ago.
Thank you KeithWould the saving in PAYE tax and Employee/Employer National insurance be an issue - could it be seen as tax avoidance despite the commercial intention between the company owner and employee
Customer: replied 1 year ago.
As a slightly variation with same commercially based employee, but with an intention to buy into the company.From a PAYE/Nic point of view, would it be acceptable for the employer and employee to agree that the employee will permanently sacrifice his salary and an equivalent amount be put to one side for the payment of dividend to the owner of the company, as part payment for equity in the company.If the owner and employee could not reach terms for the purchase of equity, would it be acceptable (from a PAYE/Nic point of view) for that employee (having worked in the company on a commercial basis) to receive those monies as a dividend. - (No need to consider share values - Just salary vs. Dividend)Thank you in advance of your help
Expert:  bigduckontax replied 1 year ago.
Not as it stands, many companies pay by means of dividends instead of salaries, but this has an the effect of increasing the company's profits for Corporation Tax (CT) as dividends do not count against CT in the computation. You have to balance one against the other from the company's point of view. There remains one further problem, dividends can only be declared from 'free' funds ie available from the companies resources without resort to not paying bills etc. Just a small point. Thank you for your support.

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