[Solved] Dividends to my wife - Diversion of income

hi,

I used to have a ltd company. accountants would set salary at around £8k for tax purposes. rest of my income left my account through dividends when i did withdrawals. CMS are pretty clued up about dividends. I declared dividends to CMS every year during the review. I would recommend you declare it.otherwise you leave yourself open to investigation, and they could cause misery for you if they decide to make you do back-dated payments based on dividend amounts.

Ok thank you for the advice. I plan on paying myself my usual wage , for that reason. My accountant told me to pay myself the minimum ( about £800pcm) but then I’d need to top up with dividends and like you say, it may come around to bite me so my plan is to just take a small amount out as dividends and keep my dividends at less than £2500 ( inline with CMS limit )

My plan is for my wife th have some dividends too but just wondering if it could be seen as diversion of income or not? Wouldn’t plan on her having a lot probably no more than £5000 a year.

Although it’s important to me I support my child, I also need to live a stable financial life myself ! Just very frustrating how it’s all calculated.

Do you know how long they could back date for ?

My understanding is that they wouldn’t know about the dividends until my annual review and even then it would be for the previous tax year. I just assumed that , for example, I took £5000 out with dividends they would just use £2500 as extra earned income ( discounting the first £2500 ?) They’d then set my payments for that year including the £2500 dividend payment of recieved in the previous year . Am I not right in my understanding?

I believe they will include the first £2500 in the assessment, so if you pay yourself 5K in dividends, that will be added to the salary to make the assessment.

I think 2 things to be careful of.

1. If your profit for the Limited company is much higher than the money you are paying yourself(salary and dividends) and you are keeping it within the company, you could find your ex asking for a variation based on diversion of income. Remember she can see online your micro accounts, so can see retained profit. If she is switched on to do that.

2. Paying your wife dividends could do the same, as they could ask what role she is fulfilling. I believe HMRC could do the same. Therefore if before a CM tribunal they could decide you are also diverting income in this way. I am less sure on this point than 1.

My advice is not to do the minimum you can, it may find you out. I do not know your full circumstances and do not need to know, but i assume your ex needs a minimum income to care for your child, and minimum salary and dividends does not add up to a lot of child maintenance. Better to offer more and lessen your chances of being found out and taken to tribunal.

Just my opinion.

Thank you for your reply. Great advice.

Yes, I do not I intend to reduce my income down to reduce my child maintenance. My accountant has said they recommend I pay myself the bare minimum and then recoup the rest in dividends. However, like you suggested, this is not really fair on my child and is risky if my ex wants to apply for a variation.

Therefore, my plan is to keep my wage at what it was when I was employed by ex employer ( before starting my own business) This means my ex will not get any reduced amount and my payment will remain the same.

However, I do intend on taking a small divided out and my wife will take one too . I predict this will be no more than £5000 jointly PA. I just wondered whether the £5000 would be taken into account with CMS and if my wife had say, £2000 in ‘ her name’ if this amount would be seen as diversion of income.

I’ve read case studies and previous court cases where they did use the wife’s dividends as income but they were significantly higher amounts. I’m not suggesting I do this solely avoid paying more CM. My contribution is fair as it is. I’d just like to be able to enjoy the money I work hard for.

I wasn’t aware the CMS could use money that was sat in my business! Almost feels like I’m hitting a wall every angle I turn. I’ve already paid of a joint mortgage and loans that accumulated with my ex without any contributions from her at all- it’s a very unfair system.

Thanks again

I do not believe that CMS can see your wife's dividends, they are only assessing your own income, so will only see your own salary and dividends.

The only time I can see this becoming an issue is if your ex takes you to tribunal for some reason and then they would look at your overall distribution of the company money and see that your wife is a shareholder and the dividends. However, the dividends are low, so not likely to be an issue, plus if she is a legitimate contributor to the business, then she is entitled to receive dividends. I think only if she is judged to be a director in name only would they have a concern. I do not believe the paying of dividends to your wife will be an issue.

All of this assumes you are continuing to pay your ex a fair amount. You say current is £310 per month. I work that put to be an approx £30K salary. If you move to £8600 salary and £5000 dividends that would reduce to £130 per month. In which case I suggest you will be asking for your ex to be unhappy and lead to a possible tribunal.

The comment about money in the business is again based on if going to tribunal. If you made 100K profit, but paid yourself £14K they would consider you are not paying yourself what you could, to avoid CM. In which case they can rule that you will pay CM on the full 100K, or more likely some figure inbetween.

As i and many find with CMS, there is inconsistencies in how rules are applied and it is always difficult to second guess......

Hi, thanks for the detailed response. Very helpful.

Yes, my salary is around £30,000 pa. I intend to keep it the same. As mentioned, my accountant did advice I reduce it to the ‘ bare minimum’ for tax purposes and take dividends instead, but I have chosen not to do this on the sole reason I do want to contribute for my child and I believe just over £300 pcm plus half of uniform , school trips etc is a fair amount. My ex is happy with this amount.

I’ll take on board the comments regarding the money left in the business, as it’s definitely something to bare in mind- thank you. Certainly for the next 2-3 years I anticipate to only have a small amount left over at wages and outgoings but it’s something to keep in mind.

If there is a legitimate tax benefit to reducing your income and taking dividends, I'd still consider it. There's nothing at all to stop you voluntarily making up the maintenance payments to the present level is CMS calculate it should be less - just let your ex know you will do this before CMS write to her so she is aware of what is going on and that it won't affect her.

How does it work say you leave the money Dividends within the company for Vat Tax pension and 2020/2021 Tax year that’s got to be taken into consideration and say what’s left within say 6 thousand as a buffer because you may not pick up work etc.
Cannot see that CMS will make you go into Debit?

Sorry being long winded.

That would not come under diversion, when there is money to be kept aside to pay corporation tax. It is to do with retained profits within the company. If your profit is high, but your salary/dividends is low, then there would be questions to be asked.

None of this is black and white, there is not a set defined amount, it would be subject to what a tribunal may think.

I am also no expert, just been on the end of an ex that likes to explore these avenues!

And my comments relate to limited company rather than sole trader etc.

Thanks
That’s what I thought with Ltd company.