If you are a Director of a limited company there are various ways you can take money out of your business. It really depends on how much you would ideally like to take, the frequency of your payments, what it is for and how much profit your company ultimately has to extract.
In this article we’ll give an overview of both and outline the duties of each with the tax implications. You can then make an informed decision of which is personally the better option for you.
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Taking a salary
It is possible to pay yourself a salary as a director. If this is the first time you will be paying a salary, you must register as an employer with HMRC.
There are benefits to paying yourself a salary, for example it is a tax deductible expense. The company can deduct tax at 19%, which is the current company tax rate (increasing to 25% from April 2023). A dividend paid is not a tax deductible expense for the company.
It can be less restrictive to take a salary as you do not have to rely on profits (though this should be a factor in deciding the figure), calculate multiple income related allowances and you can also budget effectively for your personal finances.
Though less restrictive there are many more responsibilities to registering as an employer, and that’s why many choose to use dividends alone. It is worth noting though that you can do both. Keeping track of a director’s wages and dividends is not always easy and that’s why it’s important to involve an accountant when issuing or deciding how to structure pay amongst shareholders regardless which route you decide to take.
As an employer, you will need to consider the following;
- HM Revenue and Customs (HMRC) registration
- arrange access to PAYE online
- payroll software
- Making Tax Digital (MTD)
- detailed record keeping of all aspects of pay, benefits and expenses
- National Insurance
- pension contributions
If you have an employment contract you will need to comply with National Minimum Wage requirements, so most director-shareholders do not have one. This also has implications in the event of redundancy etc.
If the company has unused Employers Allowance due to additional employees then it may be more beneficial to pay a salary to the director of the annual personal allowance of £12,570 pa 2022/23.*
Overall you will pay a higher rate of tax if you take a salary over dividends. Though many Directors lean towards a salary due to the accessibility of extra benefits and perks of having a predictable income structure.
Paying yourself in dividends
A dividend is when a portion of the profits a company has made is paid to the company Directors and / or Shareholders.
Dividends are paid to business shareholders as a form of return on their investment paid directly from the business profits. Therefore, your company must not pay out more in dividends than its available profits from current and previous financial years.
As there is no National Insurance on investment income it’s usually a more tax efficient way to take money from your company compared to taking a salary.
You also don’t pay tax on any dividends which fall within your Personal Allowance. The standard Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on.
There is also an annual dividend allowance. Which means you only pay tax on any dividend income above the dividend allowance. For the tax year 6 April 2022 to 5 April 2023 the dividend allowance is £2,000.
If your dividend payments exceed the allowance for the year, the rate of tax you pay will depend on your Income Tax band. See below for details.
Income Tax band Tax rate on dividends over the allowance
Basic rate 8.75%
Higher rate 33.75%
Additional rate 39.35%
Only shareholders can receive dividends as a reward for their investment risk. Directors who are not shareholders can not receive dividends.
There are also some formalities when paying a dividend out.
You must usually pay dividends to all shareholders.
To pay a dividend, you must:
- usually pay dividends to all shareholders.
- hold a directors’ meeting to ‘declare’ the dividend
- keep minutes of the meeting, even if you’re the only director
Also, for each dividend payment the company makes, you must write up a ‘dividend voucher’ showing the following information:
- company name
- names of the shareholders being paid a dividend
- amount of the dividend
You must give a copy of the voucher to recipients of the dividend and keep a copy for your own company records.
Additional points to consider when choosing which is best for you.
- How you take out your profit may have an impact when applying for a mortgage so it’s worth using an adviser who understands owner-managed businesses.
- However you organise your business, good accounting is essential. It is essential that you seek professional advice from an accountant to ensure you are compliant with current laws and regulations - and so that you don’t get hit with a whopping tax bill unexpectedly due to a miss-calculation.
- If you have multiple shareholder-directors, the principles of how you extract money should be written into a shareholder’s agreement and/or a director’s service contract so that everybody is clear.
If you would like to understand which payment option would be most tax efficient for you and your company, speak to Blue Rocket Accounting today.
Our expert accountants can hold a free, no obligation meeting so that you can get a full view of what will result in you taking home the best income whilst accessing all those benefits available to you as a business owner.
Call us on 01322 555442 or use our contact form here >>