UK Employee Paid partly using dividends but didn't know about it. P45 Now looks very low


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Hi,

I am a management accountant so don't get too involved in payroll or dividend accounting which is why I am seeking advice so thanks in advance.

A friend of mine has asked me for some advice regarding his payslip and it does not look right to me. I will try to explain it as simply as I can.

My friend is employed by his company and as far as he was aware was being paid via payroll only as a salary and any overtime he chose to carry out. He was laid off 26/03/2020 and expected his P45 to show almost a full years earnings (6 April - 5 April) but it doesn't. He has now been told by his ex boss its because the majority of his pay was paid by dividends which he knew nothing about and never signed to agree to this.

Lets say for example he earned £45,000 for the year, his payslips show this as all salary earnings and mention nothing about dividends. But when he has received his P45, This shows only £8,000 for the year with no tax payment as he is under the personal allowance threshold. His bank payments from his employer were always made in two parts. First one they say is for his salary of say £700 and second for dividends of £2,500 each month but he knew nothing about this until he has been laid off and assumed that this is just how they paid employees. He never signed anywhere to agree to the dividend payments, however when you look on companies house he is named as a shareholder.

We need to go back to his boss with a strong reply, how do you think we should approach this? Please let me know if you need any further information. This is very much appreciated.

Thanks
 
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Werner Reisacher

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Investors are receiving Dividends in return for their investments in a company (the company distributes profits generated to the investor)
Nothing to do with payroll, unless there is some kind of profit-sharing agreement involved. But any such agreements would have to be documented in a contract, mutually agreed and signed by both parties.
The issue I would be most concerned about is related to his taxes/social benefits. If the amount that is listed as "payroll income" is incorrect, the taxes withheld and the payroll taxes including their social contributions payable by the company to the HMRC are probably not correct either.

I would send the employer a friendly letter reminding him that he never agreed to any form of payment other than a regular salary and that he has no other option but to inform the HMRC of the situation unless the employer will send him a copy of a mutually signed agreement in which an alleged alternative payment option was agreed and/or a corrected P45.
 

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