How should directors get paid? Catherine Heinen FCCA of TaxAssist Accountants explains what options companies have when it comes to paying directors.

How should directors get paid?

As a director of an owner-managed limited company in UK you may be considering what to pay yourself, and how to structure your remuneration package. When determining your director’s pay it’s important to consider:

• tax implications and efficiency
• the director’s personal circumstances
• the business’ finances

Looking at multiple scenarios, when it comes to directors’ pay it’s important to determine what the company can afford to pay and how much the director needs to support their lifestyle, as well as the tax liability and affect that has on ‘take home’ pay. Your accountant will be able to prepare reliable calculations to help you decide on your directors’ pay.

There are three main types of pay to consider, which include the following:

1. salary
2. bonus
3. dividend

We consider the advantages and disadvantages of each below.

Salary

A company can pay directors a salary as regular remuneration for their work. It’s the most common type of payment. A director’s salary is the same as a salary paid to anyone else and is subject to Income Tax and National Insurance Contributions.

When it comes to determining the level of salary, there may be tax advantages to having a conversation with your accountant who can determine what level of salary works best.

Other advantages of being paid a director’s salary include:

• Building up your National Insurance record so that you qualify for full state pension.
• Increased relevant UK earnings mean that you may get great pension tax relief.
• Receiving a regular income can help provide evidence for mortgages and other finance and insurance.

Bonus

Directors may be paid a one-time payment which may be connected to their performance. Bonuses, like salaries, are also subject to Income Tax and National Insurance Contributions.

A bonus can act as an incentive for good performance.

Dividend

Where a director is also a shareholder, for example in an owner-managed company, they can be paid dividends from company profits. The company must have sufficient distributable profits to declare dividends.

The advantages of being paid dividends include:

• There may be a tax benefit as dividends are paid at a different rate of tax which may be lower than income tax rates.
• Dividend income is not subject to National Insurance Contributions.
• Most individuals have a dividend allowance, which means that some of their dividend income may be tax-free.

Other considerations

Alongside a director’s pay, it’s also important to look at a director’s benefits in kind. Directors may receive benefits, such as a company car or health packages that are taxable. These will influence the structure of directors’ pay.

For any individual it is essential to pay into a pension. A director can contribute personal pension contributions from their directors’ salary to give them funds on retirement.

Piecing all this together is imperative in making decisions based on reliable data. Having an experienced accountant look at calculations on your behalf puts you in their experienced hands.

About the author

Catherine Heinen FCCA is Technical Content Writer at TaxAssist Accountants and is a qualified Chartered Certified Accountant (FCCA). Catherine has extensive experience in accounts, tax returns and advising clients in practice for more than 14 years.

See also

Creditor duty: what directors need to know

What you need to know about director disqualification proceedings

How to ensure that your company information is accurate: reporting and filing requirements

Images

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Publication date

8 October 2024

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.