A company director of a UK business has several options in terms of how they pay themselves. This can be through a combination of salary, dividends and other compensation methods. There are several variables which can affect each situation such as tax efficiency, business structure and personal circumstances.
The following will provide a guide on the options available to a director:
Payment structure
A payment structure needs to be determined based on the following (for most the best tax efficient strategy will be to combine a low or minimum wage salary along with a mix of dividends):
- Salary – payment of salary monthly controlled via a company’s payroll system
- Dividends – payment based on the company profits
- Pension – contributions to a pension through a company scheme
Register as an employer
It is important that the company is registered as an employer with the HMRC. This will make sure the business runs a correct PAYE scheme (for salaries) and that both tax and NIC (National Insurance Contributions) are correctly deducted. Registration can be made directly on the HMRC website – https://www.gov.uk/register-employer.
Set-up payroll
A payroll system needs to be set-up to handle all salary payments. Options are to set this up using some payroll software or by outsourcing to an accountant or dedicated payroll provider. Calculations need to be made to ensure income tax and NIC is correctly deducted.
Determine the correct salary
There is an NIC threshold which allows a director to take a low salary and avoid paying National Insurance but still benefits from items such as state pension. For the current 2024/25 tax year this salary is £12,570 per annum. Of course, a larger salary can be taken but then NI payments will occur.
Dividends
When a company makes profit, dividends can be claimed, and payment is taxed at a lower rate than a salary. There are several steps involved:
- Calculate the amount of distributable profits (money available in the business once corporation tax and other liabilities have been accounted for).
- Declare the amount of dividends to be taken.
- Issue a dividend voucher which shows the date, company name, amount and shareholder receiving the payment (this can be handled via an online accounting software system).
- Pay the dividend.
Note: the first £500 of dividends is tax free and then the following tax rates will apply:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers
- 39.35% for additional rate taxpayers
Pension
Pensions contributions can be optional and are a tax efficient way of being paid. The company can contribute to the pension fund which will account as a business expense and will reduce the corporation tax bill.
To conclude it is really important to keep accurate records in regard to salary payments, dividends, board meeting minutes and pensions contributions. These will need to be kept for at least six years. Through the careful planning of salary, dividends and pensions a company director can effectively manage their tax liabilities and comply with all HMRC regulations.
If you would like some advice on director payments, please call our team on 01173 700 079 or e-mail hello@steppingstonesaccountancy.co.uk.
You can also book a free 20-minute call with Yarka – https://calendly.com/yarka-ssa/20min