How Do Company Directors Get Paid?

💰 The Foundation: Taking a Director’s Salary

Even though you own the company, once it is incorporated, it becomes a separate legal entity. To receive a salary, the company must register as an employer with HMRC and operate a PAYE (Pay As You Earn) scheme. This is the traditional route to getting paid, but it is often used sparingly by savvy directors.

Understanding the Tax-Free Personal Allowance

Every individual in the UK has a Personal Allowance, which is the amount of income you can earn each year without paying Income Tax. For the current tax year, this is typically £12,570. Many directors choose to set their salary at a level that utilizes this allowance while avoiding high rates of National Insurance.

National Insurance Thresholds

National Insurance (NI) is a significant consideration. There are two main thresholds: the Lower Earnings Limit (which keeps your state pension record active) and the Primary Threshold (where you actually start paying NI). Setting a salary between these two points is a common strategy for maximizing benefits while minimizing costs.

• Salaries are considered a business expense and reduce your company's Corporation Tax bill.
• You must report all salary payments to HMRC via Real Time Information (RTI) submissions every time you pay yourself.
• Taking a salary provides a steady, predictable income that can be useful when applying for personal mortgages or loans.
• Failure to register for PAYE before taking a salary can lead to significant penalties from HMRC.

📈 The Power of Dividends

Dividends are payments made to shareholders from the company's post-tax profits. Because most directors are also the primary shareholders of their limited companies, dividends form a massive part of their income strategy. They are generally taxed at lower rates than regular income, making them highly attractive.

The Dividend Allowance

HMRC provides a Dividend Allowance, which allows you to receive a certain amount of dividend income completely tax-free each year. It is important to check the current rates, as this allowance has been reduced in recent years, currently sitting at £500. Anything above this is taxed according to your income bracket.

Legal Requirements for Dividends

Unlike a salary, you can only pay dividends if the company has sufficient retained profits. If you pay a dividend when the company is making a loss or does not have enough profit to cover the payment, it is considered an "ultra vires" or illegal dividend. This can lead to serious legal and tax consequences if the company faces insolvency.

• Dividends do not attract National Insurance contributions, saving both the director and the company money.
• You must hold a meeting of directors to "declare" the dividend and keep minutes of the meeting, even if you are the sole director.
• A dividend voucher must be produced for every payment, showing the date, company name, and the amount paid to the shareholder.
• Dividends are paid from profit after Corporation Tax has been deducted, so they do not reduce your company's tax liability.

🔍 Managing the Director’s Loan Account (DLA)

A Director’s Loan Account is a record of the money you either put into or take out of the company that is not a salary, dividend, or expense repayment. While it can be a useful tool for short-term cash flow, it is one of the most complex areas of company finance.

The Overdrawn Loan Account

If you take more money out of the company than you have put in, your DLA becomes "overdrawn." If this isn't paid back within nine months and one day of the company's year-end, the company may have to pay a Section 455 tax. This tax is currently 33.75% of the outstanding loan amount.

Benefit in Kind Implications

If the company lends a director more than £10,000 at any point during the year and does not charge interest at the official rate set by HMRC, it is considered a Benefit in Kind. The director must report this on a P11D form and pay personal tax on the "benefit" of the interest-free loan.

• You can lend your own personal money to the company at any time, and you can withdraw this capital tax-free.
• Ensure your accounting software tracks every transaction to avoid accidental S455 tax charges.
• "Bed and Breakfasting" (paying back a loan just before the deadline and taking it out again shortly after) is strictly prohibited by HMRC.
• Always consult with an accountant before taking a large director's loan to understand the repayment timeline.

💡 Reclaiming Expenses and Benefits in Kind

Directors often pay for business costs out of their own pockets. Reclaiming these allowable expenses is not technically "pay," but it is a tax-free way to get money back from the company. Additionally, the company can provide certain benefits that are more tax-efficient than cash.

What Counts as an Allowable Expense?

To be deductible, an expense must be incurred "wholly and exclusively" for the purpose of the business. Common examples include travel to client sites, professional insurance, office equipment, and even a portion of your home utility bills if you work from home.

Tax-Efficient Benefits

Some benefits are exempt from tax and NI, making them a great addition to your remuneration package. For example, Relevant Life Insurance policies paid by the company are usually a deductible expense and are not taxed as a benefit for the director.

• Always keep digital or physical receipts for every expense claim to satisfy HMRC audit requirements.
• Electric vehicles currently enjoy very low Benefit in Kind (BIK) rates, making them a popular choice for directors.
• The company can pay for one annual staff party (up to £150 per head) which is a tax-deductible expense.
• Consider setting up a company pension scheme; contributions are usually an allowable business expense and are not taxed as income for the director.

🎯 The Ideal Remuneration Strategy

For most directors, the goal is to find the "Sweet Spot." This involves balancing the different payment methods to stay within lower tax bands while ensuring the company remains healthy. This often requires looking at both your personal income needs and the company's long-term goals.

The Low Salary, High Dividend Approach

By taking a salary up to the Secondary Threshold (around £9,100 per year), the company avoids paying Employers' National Insurance. If the director has no other income, they can then take dividends to fill up the rest of the Basic Rate band (up to £50,270). This strategy keeps the majority of income taxed at the lower 8.75% dividend rate.

Annual Reviews are Essential

Tax legislation changes every year in the Autumn Statement or Spring Budget. What worked last year might not be the most efficient strategy this year. You should read more about how corporation tax changes affect your ability to pay dividends and keep your strategy flexible.

• Always leave enough money in the company to cover upcoming VAT and Corporation Tax bills.
• Consider the impact of the High Income Child Benefit Charge if your total income exceeds £60,000.
• Don't forget to factor in Student Loan repayments, which are calculated based on your total income (including dividends).
• Review your statutory responsibilities to ensure your financial decisions align with your legal duties.

✅ Action Steps for New Directors

If you have recently incorporated your company or are planning to do so, follow these steps to ensure you get paid correctly from day one:

• Register for PAYE: Even if you are the only employee, you need this to pay yourself a regular salary.
• Open a Business Bank Account: Never mix personal and business funds, as this makes managing your Director's Loan Account a nightmare.
• Appoint an Accountant: A professional can help you calculate the exact salary level to maximize your tax-free thresholds.
• Set Up Record Keeping: Use accounting software to track dividends, expenses, and salary payments in real-time.
• Review Your Strategy: Check your profit and loss statements quarterly to ensure you have enough retained profit for dividend declarations.

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