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As a director and a shareholder of your own company, you will likely be excited when your hard work pays off, and you finally start to turn a profit. However, you may not know if you can draw a salary or move money freely between your company’s bank account and your own. This article will explain how you can pay yourself as a director and what you legally can and cannot do. It will also briefly outline some of the tax implications of a director’s salary.
Overview
A company is its own legal entity. That means it can own property, and any money paid to it must be accounted for. Therefore, you should record all transactions and expenses and ensure that you properly account for any payment you authorise your company to pay you.
As a director-shareholder, you are in the peculiar position of both owning your company while also being responsible for its management.
This is why it is helpful to think of yourself as having two hats, your:
- shareholder hat; and
- director hat.
You as a Shareholder
Shareholders have a right to share in the profits of the company. Therefore, because you are a shareholder, you may intuitively feel as if you should be able to move money around as you see fit, such as between your company’s bank account and your personal one. However, legally, you cannot do so.
You as a Director
As a company director, you are bound by many duties and obligations. Some of them are specific to remuneration (i.e., paying yourself), such as:
- the power to declare dividends;
- the rules surrounding directors’ service contracts; and
- your obligations to inform HM Revenue Customs (HMRC) of any salary paid to yourself or any employees.
Other duties are more general, such as the duty to exercise reasonable care and skill concerning your powers and responsibilities, including how you should account for your company’s finances.
How Do I Pay Myself?
There are two primary ways you can pay yourself as a company director by:
- salary (paying yourself a fixed amount over a week, fortnight or month); and
- declaring a profit and issuing dividend payments to the company’s shareholders (you).
Additionally, there are two other ways you can lawfully issue yourself money as a director:
- where you authorise the company to loan a director (you) money; and
- by taking lawful advantage of the rules surrounding how you can declare company expenses.
Payment by Salary
Directors have an entitlement to a salary from the company.
Whenever you pay yourself a salary, this is considered an expense from the company’s perspective.
This means your company does not pay tax when it pays you (subject to National Insurance Contribution requirements). However, you will owe tax on the salary in your personal capacity.
You can pay yourself as much as you would like, but the tax system tends to determine how much directors pay themselves (see below).
PAYE
PAYE is not a tax. Instead, it is a system that allows your company to ensure it is meeting its obligations to:
- appraise and deduct income tax from the company’s employees (including you as a director, even if you may not be an employee);
- ensure the correct National Insurance contributions (NIC) are being made; and
- declare to HMRC the amounts withheld and ensure the company is paying them.
To fulfil these obligations, you will need to:
- ensure Companies House has issued your company with an Employer PAYE reference and a Unique Taxpayer Reference;
- set up your PAYE account; and
- set up a payroll management system to generate PAYE reports for HMRC each pay period.
Payment by Dividend
A dividend is a payment authorised by the company’s directors to the company’s shareholders. Your company can only pay the dividend out of its post-tax profits.
A dividend is considered one of several company distributions. You cannot declare any distribution unless the:
- company has profits available; and
- distribution is justified.
If you make a dividend payment with no available profits, you can be held liable for making an unlawful distribution. One potential penalty could be that you will be ordered to pay back the dividend.
If you wish to issue a dividend but are uncertain if your company has made a profit, you should consult your accountant. Because the dividends come out of your company’s post-tax profits, you must set aside 19% (the current corporate tax rate) to cover your tax liabilities when your company’s taxes come due.
Other Shareholders
If there are other shareholders of the same class, you must ensure they receive the same dividend amount per share as you.
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Practical Considerations
Most directors will use a combination of dividends and salary payments to remunerate themselves to take advantage of specific tax allowances. However, other considerations, such as:
- pension contributions;
- the rights of other shareholders; and
- your company’s financial performance
may influence how you decide to pay yourself. Therefore, when in doubt, speak to your accountant.
Salary and Your Personal Income Tax
Therefore, most directors choose to pay themselves a salary of no more than their personal allowance.
Another consideration is that if you pay yourself more than £9,568 a year, you will have to contribute to National Insurance. While there are some reasons why you may want to make NI contributions, such as state pension eligibility, not all directors wish to do so. Therefore, some directors pay themselves £736 or less per month to avoid triggering the NIC thresholds.
Dividends
Generally, you can receive a dividend allowance of £2,000 per year, which means you are not taxed on this amount. However, anything above this is is subject to a 7.5% tax rates, unless your personal income (i.e. salary) exceeds £50,271 (at which point there will be higher tax rates).
Key Takeaways
Generally, a director will pay themselves through a combination of salary payments, which are taxed as personal income just like as if you were an employee, and dividend payments, which are paid out of your company’s profits. The right combination depends on your needs, your business, and if there are other shareholders in your business.
If you need help understanding your duties and pay as a director, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The two main ways are paying yourself through a fixed salary, or by declaring a profit and issuing out a dividend payment to yourself as a shareholder.
You are entitled to a dividend allowance of £2,000 per year. Anything above this is taxed at 7.5%, unless your personal income is over £50,271.
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