In the first meeting we have with brand new directors, the big question is "what the best way is to pay myself"?
As there are many options and important tax areas to consider, we thought a blog would be helpful to all you directors out there. Here are a few of our frequently asked questions you might have.
What is Pay as you Earn (PAYE) for Directors ?
Pay as you Earn (PAYE) is how you would normally receive your pay on a weekly, fortnightly or monthly basis if you were in any other form of employment. You would run a payroll, submit your figures to HMRC and pay you the net amount (your pay minus taxes). You will first need to register for the PAYE scheme - if you need help on this, just let us know.
How much should I pay myself in PAYE?
To work out how much to pay yourself you need to be realistic with your personal outgoings and what you need to live on and make sure you are earning enough in your business to pay all the expenses and yourself whilst putting money aside for your corporation tax payments.
If you want to make the most out of your income – and pay minimal tax – then you should pay yourself a fixed amount of around £732 a month.
If you do this, and have a standard tax code then you won’t have to pay any form of tax or National Insurance, and you can withdraw any other profits via dividend. If you choose to pay yourself this salary, then you will still get all of the benefits of a state pension, and some other National Insurance perks. However, you will have to be registered as an employer, and you need to file a Real Time Information (RTI) return.
What are Dividends and how can I pay them?
You may get a dividend payment if you own shares in a company, this is true for Directors who are also shareholders and you can earn some dividend income each year without paying tax.
How this is achieved is you do not pay tax on any dividend income that falls within your Personal Allowance (the amount of income you can earn each year without paying tax). On top of this you also get a dividend allowance each year. You only pay tax on any dividend income above the dividend allowance.
In order to make a dividend payment, you should have a meeting with any other Directors to “declare” the dividend along with minutes of the meeting (even if it's just you) and remember to issue a dividend voucher to all shareholders.
You can get a dividend voucher straight out of Xero, this is one of the helpful features Xero offers its subscribers and why we love the software so much.
Warning - Don’t take more dividends than profits!
This is a big old no, no.
You can only issue dividends if your business has made a profit, so make sure your accounts are up to date and if you need to check this, contact your accountant or tax adviser.
If you take more money out of a company than you’ve put in - and it’s not salary or dividend - it’s called a ‘directors’ loan’. If your company makes directors’ loans, you must keep records of them. There are important rules around Directors loans which you need to be aware of if you find yourself owing your business money. and it is over £10,000 you can get taxed an additional 32.5% - ouch.
How are dividends taxed?
If you want to avoid paying tax, then the tax-free limit on dividends is £2,000 in the 2020/21 tax year.
How can I work out tax on dividends?
How much tax you pay on dividends above the dividend allowance depends on your Income Tax band.
Tax Band Tax Rate
Basic Rate 7.5%
Higher Rate 32.5%
Additional Rate 38.1%
To work out your tax band, add your total dividend income to your other income. You may pay tax at more than one rate. You may need to register for self assessment to make sure you are taxed correctly, if you need help with this, send us a message.
National Insurance for company directors
Directors are classed as employees and pay National Insurance on annual income from salary and bonuses over £9,500.
Contributions are worked out from their annual earnings rather than from what they earn in each pay period.
Companies also pay employer’s National Insurance on directors’ salaries. This applies even if you’re the director of your own company running payroll and the only employee.
We would always recommend you use payroll software to report to HMRC and we would recommend using Xero for this
There are 2 different ways of calculating national insurance as a Director and as we are currently part way through the year and you spot it would be best to be on the different NI scheme you may be able to change your method during the tax year depending on your payroll software.
What is the Standard annual earnings period method?
This method is common for directors who are paid irregularly. Each time you pay a director, work out their National Insurance for their total pay over the tax year so far, including bonuses. To work out what contributions they now owe, take off the total employee National Insurance they’ve paid so far this year.
What is the Alternative method?
This method is common for directors who are paid regularly.
Each time you pay a director, work out their National Insurance only on their pay for that period, including bonuses.
At the end of the tax year, use payroll software to work out whether more employee National Insurance is due and deduct it from their last payment. We hope this has provided some clarification for you on how to pay yourself as a Director of a limited company.
Either way - there are some great options for getting your self paid - but you can see that it's so important to get the right system in place, not only to pay the right amount of tax, but also to not fall foul of paying painful interest rates.
If you would like to talk to us about the most tax efficient way to pay yourself, get in touch with us at firstname.lastname@example.org, we would be happy to help.