A Comprehensive Guide to Directors Pay in the UK

Understanding the different methods of Directors Pay is crucial for maximizing earnings and effectively managing tax liabilities, both personally and for the company

Salary:

A salary is a routine payment provided by the company to a director and is the most prevalent form of compensation for directors.

Advantages

• State pension years that qualify for it: Having a regular income that is greater than the earning limit of earnings means director earns qualifying years towards their state pension.
• Contributions to personal pensions: Allow for higher tax relief for personal pension contributions since your applicable UK income will be greater
• Income proof: A regular income may make it easier to bring the evidence needed to obtain loans or for insurance against critical illness.
• The eligibility for redundancy: Having been paid a salary could be a sign that director’s eligibility for redundancy payouts

Disadvantages

Income tax and NICs: Directors’ salaries are subject to income tax and National Insurance Contributions (NICs)

Tax Rates and Considerations

In the UK, the tax rates for different types of income vary:

Bonus

The term “bonus” refers to a single amount paid to directors. They may be annual or could be linked on the achievements of directors. They can be non-contractual or contractual.

• A contractual bonus implies that directors and employees are aware of their rights to receive a bonus. It is typically calculated on the performance. A contract might also provide the guarantee of a specific amount.
• A non-contractual reward is a situation where a company can decide how much a bonus is paid out and in what amount.

Bonuses are tax-exempt and NICs when applicable.

Dividends

Dividends are the payments to shareholders using the company’s earnings. Directors who are shareholders may also receive dividends.

Advantages

Tax rates that are lower Tax rates for dividend income: The tax rate for dividends may be lower than that of income tax.

There are no NICs No National Insurance contribution is due on dividends

Dividend allowance The majority of people in the UK are entitled to an allowance for dividends, which payoff with tax-free income as high as PS500 per year.

Disadvantages

Reserves for distributable distribution Dividends are only able to be paid out of profits from the company and the company must be able to have enough reserves for distribution.

Reimbursement of costs

Costs paid directly through the director’s behalf on company can be reimbursed. Examples of personal expenses can include subsistence and travel as well as other equipment and services.

Drawings

Contrary to a sole trader business, a limited company an entirely separate business entity from its managers and owners. This means that, unlike the case of a sole trader company, you are not able to take any drawing. In the case of taking a payment from a restricted company that isn’t dividend, bonus or salary is declared as an unpaid loan to director. Directors loans must be managed in a manner that is appropriate to the situation.

How to select directors’ compensation Dividend vs salary

Many factors impact the choice of the way a director will be paid. In general, directors of owned companies are paid an equal amount of salary. Dividends as well as bonuses in the most tax efficient manner. There are a few things to take into consideration when determining which is the perfect way to pay and the balance payment.

• Efficiency in taxation: Asking your accountant to create calculations can benefit you reduce your tax burden. The calculations could contain several different choices to think about and you can select the tax-efficient mode of payment.
• Financials for business: It is crucial to warrant the business has enough profits to pay dividends. And be able to pay for bonus and salary payouts. If your bonus and salary have wiped out company profits there could be no distribution reserve to pay dividends to shareholders.
• Personal circumstances: A different consideration is the personal situation of directors. For instance, they have financial targets, obligations and other sources of income.

Taxable benefits in the form

In in addition to bonuses, salary and dividends Directors may also be eligible for tax-deductible benefits. These may include company vehicles as well as medical insurance, fuel, and other advantages.

Benefits that aren’t tax-free (such such as parking at work, mobile phones and beverages at the workplace) are subject to income tax as well as the NICs.

Directors’ Pension

As a director in a limited company, registering in a pension scheme for the company. Lets you plan for your future. Contributions to pensions made by the company are also an allowed expense for limited companies.

Saving for a pension can be an excellent method to make money from your company that you’re happy to deposit into a retirement account which you can access upon retirement.

What Account-Ease accountants can do to benefit

Our experts are able to benefit you with regards to organizing your pay in the desirable way that suits the individual, taking into consideration your specific situation as well as tax efficiency. Contact our helpful team by giving us a call at 0208 133 4599 or fill out our on-line Contact form.