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It is common for company directors to own shares in the company. If your business has had a successful period, you may wonder how you ought to pay yourself. You may want to know if you can move money freely between the company’s accounts and your own or if there are legal restrictions. Likewise, understanding the tax implications of paying yourself is crucial. This article will go over the two main ways directors pay themselves; through a salary and after-profit dividends. It will also examine some practicalities you may wish to consider.
Paying Yourself as a Director
Your company is its own legal person. That means it owns its own property, including any money it receives from your customers or clients. This ties into one of the foundations of English company law – there are only a limited number of ways for a company to distribute its money.
The effect of this is that, legally, you cannot just move money around without adequately accounting for it. Therefore, you should properly record each transaction and expense, including how you decide to pay yourself.
Shareholder-directors often struggle with the legal reality because, day-to-day, you are the one doing all the work. You are the one that has won your customers. You are the one managing your company’s administration. Therefore, the fact that you cannot just pay yourself as you see fit seems unintuitive.
Importantly, this is why it is helpful to think of yourself as having two hats:
- your shareholder hat; and
- your director hat.
You cannot wear both at the same time. When it comes to paying yourself, this has important implications.
Your Shareholder Hat
Shareholders have a right to share in the profits of the company. Therefore, because you are a shareholder, perhaps you intuitively feel as if you should be able to move money around freely as you see fit. For example, you may feel like you can move funds between your company’s bank account and your personal account. However, legally, you cannot.
This applies even if you are the sole shareholder, sole director, and no one else works for you.
Your Director Hat
As you may know, the Companies Act imposes many duties and responsibilities on you as a director. Some of these relate to how you can pay yourself. Examples include:
- how the company can enter into service contracts with its directors;
- your power to declare dividends; and
- your obligations to keep HM Revenue Council (HMRC) up to date and meet all other tax obligations.
Additionally, this is vital to keep in mind. If you do not pay yourself as the law permits, you will breach your duties and be held liable.
How to Pay Yourself
There are effectively four ways to pay yourself:
- through a salary;
- by dividend;
- by authorising a director’s loan; or
- through the use of corporate tax write-offs for company expenses.
In practice, the bulk of your remuneration is done through salary and dividends. Therefore, we will only consider these two.
Payment by Salary
The law permits directors to pay themselves a salary, just as they would pay any other employee. You can even authorise your company to employ you, which would give you a third hat (though this is beyond the scope of the article).
Whenever you pay yourself a salary, this is considered an expense from the company’s perspective. Notably, your company does not pay taxes on expenses. However, you are personally liable for the taxes you owe from your salary (just as if another company employed you).
Likewise, you can pay yourself as much as you would like. Although, the tax system tends to determine how much directors pay themselves.
Payment by Dividend
Directors have the power to authorise a dividend, but only if the company has:
- available profit; and
- you can justify paying a dividend.
In practice, these two requirements will coincide for most small businesses. However, if you have any doubts, you should speak to your accountant because what constitutes a profit is chiefly a financial question.
Since dividends require the company to make a profit, you must pay corporation tax on your profits.
While you can declare a dividend as many times in the accounting period as you wish, it is often sensible to issue dividends quarterly from an accounting perspective.
Other Shareholders
As a rule of company law, all shareholders of the same class must be treated equally. This means that if other shareholders hold the same kinds of shares as you, they are also entitled to the same amount issued per share. This is one reason why dividends are calculated based on the amount paid per share.
For example, suppose your company has 100 ordinary shares. After setting aside all your revenue for expenses, you have £12,000 left over, which you want to issue as a dividend. So, you must set aside £1,320 in tax liability (19%), leaving you with £10,680. With this amount, you can issue this as a dividend payment to your shareholders.
Importantly, you must pay each share the same amount. In this case, £106.80 per share.
If you have 50 shares and another shareholder (who is not a director) also has 50, that means you, as a director, must pay you and the other shareholder the exact same amount per share (£5,340 in total, each). Anything other than this means that you will violate other shareholders’ rights. Consequently, the law can hold you liable.
That is one reason why there may be multiple shares in existence, each with different rights to a different share of the dividends.
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Practical Considerations
Salary
The most tax-efficient way to pay yourself is a combination of dividends and paying yourself a salary up to £12,570. This is because everyone is entitled to a “personal allowance.” This is the amount of income received that the government does not tax.
Another consideration is ensuring your company makes its National Insurance Contributions. Any amount you pay yourself in excess of £736 will create obligations for your company to pay a certain amount towards NIC. While there are some benefits to doing this (mainly related to your state pension entitlement), not all directors find this desirable.
Dividends
Generally, you are entitled to a “dividend allowance” of £2,000 per year, meaning you do not pay tax on this amount. However, anything in excess of this is liable to tax at 7.5%, provided that your personal income (i.e. salary) does not exceed £50,271. At this point, your dividends are taxed at a higher rate.
Key Takeaways
Generally, directors 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 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
There are effectively four ways that directors can pay themselves. You can receive payment by salary, dividend, authorise a director’s loan, or through the use of corporate tax write-offs for company expenses.
As a shareholder-director, think of yourself as having two hats: your shareholder hat and your director hat. Importantly, you cannot wear both at the same time. When it comes to paying yourself, this has important implications. Legally, you cannot simply move funds between your company’s bank account and your personal account.
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