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Dividend vs Salary - The PA Holdings Case

Posted May 2, 04:22 PM

By malcolm

Following the news that the PA Holdings case will not be appealed we can consider the implications of the ruling in this case.

The case had particular circumstances but dealt with the question of whether certain payments made by the company to its employees should be taxed as earnings or dividends. The court held that they were earnings. The implication is that tax and national insurance should be paid.

Whilst the case had particular facets it is worth considering if there are wider implications.

HMRC have acknowledged that the case does not apply to every situation and the choice of dividend or salary for most owner managed businesses is not affected. The general strategy of low salary with a top up by way of a dividend appears to remain safe.

The so called “alphabet share” arrangements may come under a closer examination. These are particularly vulnerable where the only right attaching to the shares is a right to dividends. It is less likely that HMRC will challenge arrangements where shares also carry voting rights and have capital value.

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