Your Minimum Salary

The line between tax evasion and tax avoidance becomes thinner as tax laws and tax planning become ever more complicated.

Problem

One area of that line affects many limited companies, which have recently gone limited to take advantage of the first £10,000 of tax-free profits. (Gordon Brown – GB companies). Usually a minimum wage is drawn (£91 a week) to obtain NI benefits, dividends are then used to boost cash income, however how can such modest pay fit in with the NMW (National Minimum Wage) legislation without working less hours?

Criminal!

The NMW applies to all contracts of employment, even if you work for your own company. So you must tread carefully as not to breach the NMW legislation as this could leave you with a £5,000 fine and a criminal record.

Office Holder

An office holder is a statutory appointment to the board of directors, which the director may be paid in full for fulfilling that function. Even though he can do work this will not make the director an employee of the company and therefore the NMW legislation doesn’t apply.

Director

If a director of a limited company has a contract of employment (this doesn’t have to be in writing it can be implied over the course of time) they are deemed employees for the purposes of NMW.

Enforcement

There are already plenty of directors of recently formed GB companies in this position. And most are both officers and workers but how many are under investigation by the taxman for not paying the NMW? It seems the taxman is now making it an enforcement priority.

Advice

If you are one of the people using this system then there are a few points to remember,

• Make sure the remuneration is paid to an office holder (director) and not as a worker. You should also have a board meeting recording this.
• Avoid having a written contract of employment; in fact there shouldn’t be any documentation that would suggest an employer/employee relationship.
• Don’t make it obvious there is no need for a document stating that you don’t have a contract of employment as it would be odd and may provoke further questions.

Shareholders are governed by the NMW rules if they also work for the company unless they are also office holders, e.g. Secretary or President.