How Does a Company Director Get Paid in England and Wales?

Summary

• Company directors can pay themselves through a salary (PAYE), dividend payments, or director’s loans, each with different tax implications.
• Combining a small salary with dividends is often the most tax-efficient approach, as dividends are taxed at lower rates and are not subject to National Insurance Contributions.
• Dividends must be formally declared at a board meeting and supported by dividend vouchers issued to shareholders.
• This article is a plain-English guide for company directors and business owners in Australia, explaining the legal options available for drawing income from a limited company.
• The content is produced by LegalVision, a commercial law firm that specialises in advising clients on corporate and business law matters.

Tips for Businesses
Set your director’s salary at or near the Personal Allowance threshold to minimise income tax. Top up your income with dividends where possible, as these attract lower tax rates. Keep records of all board meeting declarations and issue dividend vouchers promptly. Consider a director’s loan only for short-term cash needs.

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On this page

• Company Director’s Salary
• Dividends
•  How Are Dividends Issued?
• Director’s Loans 
• Key Takeaways
• Frequently Asked Questions

As a company director, there are several different ways in which you can pay yourself a wage or a salary. When running a limited company, your personal bank will be separate from your company’s profits. In contrast, a sole trader would receive business profits into their bank account, on which they pay personal income tax.

This means that your income as a company director will be separate from direct company profits. Therefore, you need to decide the best way of paying yourself from those profits. The two most common options are paying yourself a salary or paying yourself out of company dividends.

This article will explain how a director can receive their pay and offer some advice on the best way to pay yourself as a company director.

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Company Director’s Salary

Company directors often earn a salary as part of their position. In this way, the director is like an employee of the business and may even have an employment contract. This is sometimes referred to as Pay As You Earn (PAYE). To receive a salary this way, an individual must register for the PAYE scheme with Her Majesty’s Revenue and Customs (HMRC).

The company will then need to deduct income tax from the director’s salary and Class 1 National Insurance Contributions. Then, the company will send this to HMRC recurringly (usually every month).

A company’s balance sheet will categorise employee salaries as a cost and often tax-deductible expenses. Essentially, the company will pay the individual before receiving tax on its profits via corporation tax.

As a result, many companies opt to pay their directors a small salary, then top the director’s pay with dividend payments. The salary often reaches the Personal Allowance rate of around £12,000.

Dividends

Dividends are a payment made to shareholders of a company. After the company receives tax at the corporation tax rate (19%), shareholders will receive their dividend. Most company directors are also shareholders so they can receive dividends alongside their basic salary. Therefore, the number of dividends they receive will usually reflect the number of shares they have in the company.

There are several benefits to receiving your payment via dividends rather than a basic salary. For example:

• you will not pay National Insurance Contributions on dividends;
• dividends receive tax at a lower rate than income tax;
• you can receive dividends at any period – this can be monthly, quarterly, annually, or any other point at which the recipient chooses.

Dividends of up £2,000 are tax-free, but any amount above that will receive tax at roughly the following rates:

• 8.75% up to £50,000 annual income;
• 33.5% between £50,000 – £150,000; and 
• 39.35% above £150,000. 

 How Are Dividends Issued?

To issue dividends, company directors must make a declaration at a board meeting and agree on a date for payment. Shareholders will then receive dividend counterfoils (or dividend vouchers) when the directors declare the dividends. These documents are either an electronic document or a piece of paper and will outline:

• the company name and registration number;
• when they issue the dividends;
• the shareholder’s name and address;
• the amount of the payment;
• the number and class of shares the company will issue the dividend payment.

Director’s Loans 

A director’s loan is an alternative method of taking money out of a limited company. This is a tax-efficient way to make money out of a company. However, this is a process of borrowing money rather than receiving a regular salary. 

Furthermore, the company usually records the director’s loan in a loan account. Additionally, a director can loan money to the company as well as the company loaning money to the director. 

Director’s Loans: What You Need to Know

If you borrow money from your company, you must repay it within nine months of the company’s accounting year-end. If you do not repay it in time, the company must pay an additional tax charge of 33.75% on the outstanding amount. HMRC calls this the S455 tax charge.

You should also track every loan carefully in your director’s loan account. This account records all money you take out or put into the company outside of salary and dividends.

If your loan exceeds £10,000, HMRC treats it as a benefit in kind. This means you may owe income tax on it, and the company may need to pay Class 1A National Insurance Contributions.

Key Takeaways

As a company director, there are many ways to structure your salary. Many directors will earn money from a small salary coupled with dividend payments. A director’s salary will often sit at the Personal Allowance rate. Moreover, shareholders will receive dividend payments at the discretion of the board. Often, these payments will supplement their basic salary. In most cases, this can be a tax efficient way of paying yourself money. This is because dividends often receive tax at a slightly lower rate than personal income. Finally, a director could also take money out of a company through a loan if they need access to instant cash. 

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Frequently Asked Questions