Directors Remuneration
Optimise the take-home pay of shareholder-directors
Director-owners should make the most of allowances available
Directors who are also company owners ('shareholders') can optimise their take-home pay by getting the balance right between salary and dividends. Salary and dividends are taxed at different rates, and different tax-free allowances apply.
Why pay salary?
It's important to pay sufficient salary to protect your entitlement to state pension and contribution-based benefits, as well as to enable you to make pension contributions.
Directors who are also employees must also comply with the National Minimum Wage rules.
Salaries are subject to income tax and national insurance.
What are dividends?
Dividends are payments made to shareholders from the company profits remaining after tax. They are usually paid 'per share'.
Note that your company must not pay out more in dividends than its available profits from current and previous financial years. Read more about the rules for paying dividends at https://www.gov.uk/running-a-limited-company/taking-money-out-of-a-limited-company.
Latest allowances and tax rates (2023-24)
Dividends
Dividend taxes were raised to 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate) from 6th April 2022 and currently will continue indefinitely.
Dividend allowance has been reduced to £1,000. So the first £1,000 you receive in dividends is tax free.
Income Tax
Personal Allowance £12,570.
Tax rates
Basic rate (£12,571 - £50,270) 20%
Higher rate (£50,271 - £125,140) 40%
Additional rate (over £125,140) 45%
Personal Allowance is restricted with earnings over £100,000 by £1 for every £2 over £100,000 (see gov.uk/income-tax-rates/income-over-100000)
See gov.uk/income-tax-rates for an overview and guidance for further details.
National Insurance
Most employed people pay class 1 National Insurance
Employees:
12% on earnings between £242 to £967 a week (£1048-£4,189 a month) and
2% on earnings over £967 a week (£4,189 a month).
Directors pay the same rates, but their National Insurance can be calculated on an annual or an alternative method, where it is calculated on an annual or monthly basis.
Employers:
13.8% on earnings over £175 a week (the 'secondary threshold, equivalent to £9,100 each year).
See gov.uk/national-insurance for an overview, and guidance for further details.
Corporation Tax considerations
As well as affecting tax paid by the Director, the balance between salary and dividends also has an impact on the company's tax position.
When income is taken as a salary, bonus or pension contributions, it is an allowable deduction for Corporation Tax, so the company pays less Corporation Tax on its profits. However dividends are taken from profits after tax, so the company's Corporation Tax bill will be higher.
Cash and funding considerations
As well as the impact on personal and company tax, you should consider the impact of Directors remuneration on cashflow.
PAYE taxes and employers National Insurance contributions must be paid each month, by the company
tax on dividends are payable through Self Assessment by 31 January after each tax year (a payment on account may be required by 31 July), by the individual
Corporation Tax is payable annually 9 months and 1 day after the company's year end, by the company (large companies can pay in quarterly instalments)
If your company has sufficient profits but needs working capital, you can declare a dividend but retain the cash in the business in the form of a 'Directors Loan'. The Directors Loan can be repaid at a later date agreed with the company. The Director will still be responsible for paying income tax on these dividends.
The Company's ability to borrow money may be affected if a large salary or bonus is taken which reduces the profits shown in the company's accounts.
R&D Tax claim considerations
If a director is spending time on research and development and the Company is making a claim for R&D tax relief, only the Director's salary is taken into account in the claim and not the dividends. Depending on the claim and amount of time the director is spending on R&D, the salary and dividend mix will need to be considered further.
Example
Below we've looked at three examples. They all assume the company has sufficient post-tax profits to pay dividends:
£50k salary v minimal salary and dividends
£100k salary v minimal salary and dividents
£48k take home
Click on the tabs at the bottom of the table to show each example.
This is complex area, so please contact us for advice tailored to your circumstances.
High income child benefit tax charge
The High Income Child Benefit Tax Charge applies to taxpayers with an income of over £50,000 who are (or whose partner is) claiming Child Benefit. To avoid the charge, keep your income below £50,000 each year.
The charge is equal to one per cent of a family’s Child Benefit for every £100 of income that is over £50,000 each year. If an individual’s income is over £60,000, the charge will equal the total amount of the Child Benefit.
Find out more at https://www.gov.uk/child-benefit-tax-charge, with more details available at https://www.gov.uk/government/publications/high-income-child-benefit-charge-data/high-income-child-benefit-charge.
Marriage allowance
Marriage allowance can be claimed if one spouse or civil partner earns below the personal allowance and the other pays tax at basic rate.
Claiming marriage allowance can result in a saving of up to £252 each year.
Find out more at https://www.gov.uk/marriage-allowance.
Pension contributions
Your company can make pensions contributions as an alternative way of extracting funds from your business. Up to 5th April 2023 it can contribute up to £40,000 (£60,000 from 6th April 2023) each company tax year (subject to your annual earnings and 'lifetime allowance' - see https://www.gov.uk/tax-on-your-private-pension for more details). [NOTE that pension needs to actually be paid in the company tax year - can't just make accounting adjustment, whilst the lifetime allowance is abolished from 6th April 2023 though this may change in the future upon a change of government].
Pension contributions have the added advantage that they attract corporation tax relief when paid (as do salary payments). When do you take your pension you can usually take a 25% tax free lump sum (see https://www.gov.uk/tax-on-pension/tax-free).
The main disadvantage is that your funds will be locked away, normally till you're at least aged 55 (expected to rise to 57 in 2028).
Cryptocurrency
What is cryptocurrency?
Cryptocurrency is a form of currency that exists digitally. It enables investors to buy, sell and trade currency digitally and unlike traditional currencies can circulate without central control by national governments. There are numerous cryptocurrencies of which Bitcoin was the first and is probably the most well known.
The potential for high returns is attractive to many investors, together with the accessibility and anonymity which comes with no centralised control. However the market can also be very volatile due to the lack of regulatory control.
How is it taxed?
‘Crypto’ is treated as an asset in the UK, however there is no specific UK ‘crypto’ tax. Instead you can be subject to income tax or capital gains tax on your crypto investments.
Crypto income or earnings, such as getting paid by your employer in crypto or rewards received when staking or mining for crypto (similar to interest received or dividends from more traditional investments) will be subject to UK income tax.
Crypto gains, which can arise when selling, swapping or gifting crypto will be subject to Capital Gains Tax. If total gains in a year are less than £12,300 (the current CGT threshold) you won’t have any capital gains tax to pay.
What records should you keep?
In order to complete the relevant sections of your tax return for crypto we will need records of all crypto transactions carried out during the tax year.
This information should include type of crypto, value and number of coins held, buying and selling dates, sterling values, other costs incurred or rewards gained, contact names of buyers and sellers etc.
Most crypto trading portals should have a facility to help you produce the relevant reports or download the information needed to meet your self assessment obligations.