Is it illegal to stop a director’s salary and dividend?

Question from Fi, Is it illegal to stop a director’s salary and dividend?

Answer from AI:

In the UK, the actions described involving Robert and the other director raise several legal and ethical issues. Directors have certain rights and responsibilities, and any decision to stop a director’s salary or dividend must comply with company law and the company’s articles of association.

Directors’ Rights and Responsibilities

Directors are typically entitled to remuneration as agreed upon by the company’s board or as outlined in their service contracts. Stopping a director’s salary or dividend without proper justification or agreement can be problematic.

• Company Law: Under the Companies Act 2006, directors have a duty to act in the best interests of the company and its shareholders. Decisions should not be made for personal gain or to the detriment of other directors or shareholders.
• Articles of Association: The company’s articles of association may outline specific procedures for determining directors’ remuneration. Any changes to a director’s pay should follow these procedures.
• Service Contracts: If the director has a service contract, it may specify terms regarding salary and dividends. Breaching this contract could lead to legal action.

Tax and National Insurance Considerations

Robert’s actions to avoid paying Employer’s National Insurance contributions and minimize tax liabilities could potentially be illegal if they involve tax evasion.

• Tax Evasion vs. Tax Avoidance: Tax evasion is illegal and involves deliberately misrepresenting or concealing information to reduce tax liability. Tax avoidance, while legal, involves using legal methods to minimize tax.
• HMRC Regulations: The HM Revenue and Customs (HMRC) has strict rules against tax evasion. Deliberately avoiding National Insurance contributions could be considered evasion if it involves deceit.

Potential Legal Actions

If the other director believes her rights are being violated, she may consider the following steps:

1. Review Company Documents: Check the company’s articles of association and any service contracts for terms related to remuneration.
2. Seek Legal Advice: Consult with a solicitor specializing in company law to understand her rights and potential remedies.
3. Report to HMRC: If there is evidence of tax evasion, it may be necessary to report the issue to HMRC.
4. Consider Mediation: If the issue is primarily a dispute between directors, mediation might be a way to resolve the conflict without going to court.

When to Seek Legal Advice

Given the complexity of company law and tax regulations, it is advisable for the affected director to seek legal advice. A legal professional can provide personalized guidance based on the specific circumstances and help navigate potential legal actions.

For more information on directors’ duties and company law, you can refer to the [Companies Act 2006](https://www.legislation.gov.uk/ukpga/2006/46/contents) and HMRC’s [guidance on tax evasion](https://www.gov.uk/government/organisations/hm-revenue-customs).

It is crucial to address these issues promptly to ensure compliance with legal obligations and protect the rights of all parties involved.