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How Do Company Directors Get Paid in England and Wales?

Table of Contents

In Short

  • Pay yourself a salary up to ÂŁ12,570 to utilise your personal allowance and avoid income tax.

  • Declare dividends from post-tax profits; the first ÂŁ2,000 are tax-free, with higher amounts taxed at 7.5% if your income is below ÂŁ50,271.

  • Maintain clear records and adhere to legal requirements to avoid personal liability.

Tips for Businesses

Consider paying yourself a combination of salary and dividends to optimise tax efficiency. Ensure your company has sufficient profits before declaring dividends. Regularly consult with an accountant to comply with tax obligations and maintain proper financial records. Remember, personal and company finances must remain separate.

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 account will be separate from your company’s profits. This means that your income as a company director will be separate from the direct profits of the company. 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 (provided you are also a shareholder of the Company and able to pay dividends to yourself as a shareholder). This article explains how a director can receive their pay and offers advice on the best way to pay yourself as a company director.

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. To receive a salary in this manner, an individual must register for the PAYE scheme with Her Majesty’s Revenue and Customs (HMRC) and should also be formally employed by the Company. 

The company will then need to deduct income tax from the director’s salary and 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 £12,570.

Directors Service Agreement

If a company director is going to be paid a salary and employed by the company, then they will need to enter into an employment agreement or a tailored directors’ service agreement with the company. If the director is not going to be employed by the company, they could also be contracted and receive a fee for their services as a contractor in accordance with a contractors’ agreement or directors’ service agreement. Whether the director is an employee will depend on various factors. 

A directors’ service agreement may include various benefits that the director will receive related to their position, such as:

  • a car allowance;
  • private healthcare; and
  • directors’ insurance.

If the agreement has a guaranteed employment term of more than two years, the agreement will need to be approved by the shareholders through an ordinary resolution.

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Dividends

Dividends are payments made to shareholders of a company. Most company directors are also shareholders, so they can receive dividends alongside their basic salary, provided that the company is entitled to declare a dividend. The amount of dividends they receive will usually reflect the percentage 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; and 
  • you can receive dividends at any period (monthly, quarterly, annually, or any other point at which the company has declared the dividend).

Dividends declared after 6 April 2024 of up ÂŁ500 are tax-free. How much tax you pay on dividends above the dividend allowance depends on your Income Tax band. This means dividends will receive tax at roughly the following rates (which includes any other income and where you may pay tax at more than one rate):

  • 0% up to ÂŁ12,570 (personal allowance);
  • 8.75% between ÂŁ12,571 ÂŁ50,270 annual income;
  • 33.75% between ÂŁ50,271 – ÂŁ125,140; and 
  • 39.35% above ÂŁ125,140.
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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.

Tax Planning and Compliance for Directors

When deciding how to pay yourself as a company director, it is important to consider tax planning and compliance. 

Directors must keep accurate records of all payments, including salaries, dividends, and loans. You are also required to file a Self Assessment tax return each year, declaring all sources of income.

Many directors choose to pay themselves a small salary or contractors fee if they are not employed, often below the National Insurance threshold, and take additional income as dividends.

To stay compliant and make the most of available tax allowances, it is advisable to seek professional advice from an accountant or tax specialist. This ensures you meet your legal obligations and optimise your income strategy.

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 are often taxed 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.

If you need advice on payment options as a company 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 on 0808 196 8584 or visit our membership page.

Frequently Asked Questions

What is a dividend payment?

A dividend payment is a distribution of a company’s profits to its shareholders. Companies typically issue dividends in the form of cash or additional shares, providing a return on the shareholder’s investment. The decision to pay dividends is made by the company’s board of directors and is often based on the company’s profitability, growth strategies, and cash flow requirements. Dividends are usually paid on a per-share basis and can be issued regularly, such as quarterly or annually.

What is personal income tax?

Personal income tax is a tax levied by the government on an individual’s earnings, including wages, salaries, investments, and other sources of income. This tax is calculated based on the individual’s net income, which is the total earnings minus any eligible deductions or allowances. The rates and structure of personal income tax vary depending on the country, and in some systems, tax rates increase as income rises (progressive tax). Personal income tax is typically collected by the government through automatic payroll deductions or by individuals submitting annual tax returns.

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Tom Khalid

Tom Khalid

Trainee Solicitor | View profile

Tom is a trainee solicitor at LegalVision. He studied History at the University of Leeds before completing the PGDL at the University of Law.

Qualifications: Postgraduate Diploma in Law, University of Law, Bachelor of History, University of Leeds. 

Read all articles by Tom

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