Guide to being paid as a Director / Shareholder.
Many people trade through a Limited Company
, which is very different
from being a Self Employed / Sole Trader
when dealing with tax
If you are a Director and Shareholder
of your own small limited company then the basic ways of paying yourself are by salary
Salary and Dividends are very different from each other when calculating tax.
are an Expense
and an allowable deduction when calculating the company's Corporation Tax
are a distribution of Profit
and are not an allowable Expense.
Getting Paid From The Company - The Basics
As a Director
, you are (usually) an employee of the company
, and therefore would normally receive a salary
, just like any employee of any other company. The company must also submit a monthly PAYE / Payroll
As a Shareholder
you may receive Dividends
, just like having shares in a big national company.
So as a Director / Shareholder you would receive a mixture / combination
of salary and dividends, and your accountant will advise you on the best combination for tax efficiency within the rules.
Paying a Salary - as a Director / Employee
The important factors to consider are:
• An individual’s personal tax free allowance (£11,000 2015/16; £11,500 2017/18) which is the earned income amount each year which is tax free.
• Employee’s National Insurance on salary (2016/17: 12% on monthly salary between £672 and £3,532; then 2% thereafter).
• Employer’s National Insurance on salary (2016/17: 13.8% on monthly salary over £676 with no upper limit).
A Director may receive a bonus from the company in addition to salary, but there are conditions with regard to the tax treatment.
The basis of the bonus, and calculation, should be documented and minuted.
A bonus which is decided and paid during a company's accounting year, for that current accounting year, is usually problem-free in terms of tax regulations, but subject to the usual rates of tax.
A bonus which is decided and paid after a company's accounting year has ended, but relates to that prior year
, is subject to several tax regulations.
The bonus can only be accrued in the company's previous accounting year, and be allowable for Corporation Tax in that prior year, if it was agreed and documented during that previous accounting year. Alternatively, if it would be allowable if it was a regular event every year, ie 'custom and practice'. The accounting treatment is to credit to accruals, not the Director's Loan Account
A bonus is regarded as being paid when either a specific payment is made to the Director, or the Director's Loan Account
is credited. This date is the relevant date for the bonus to be submitted on the monthly PAYE/RTI
Paying a Dividend - as a Shareholder
The tax calculation on Dividends changed for the Income Tax year 2016/17 (starting 6/4/16)
The new rates and bands are described on our web page: New Dividend Tax Calculation
You may also claim some expenses which your accountant will advise you on.
Loans from the Company
A Director may also borrow money from the company, but this is subject to strict tax rules. These are described on our webpage on the Director's Loan Account
If you withdraw money from the company, and it is not identified as salary, dividend or expenses, then it would normally be regarded as a loan to you - which must be repaid
in certain time limits or suffer a tax charge.
The above information is for limited companies in general.
There are some specific regulations which apply to Contractors
These webpages are intended to provide a helpful general guide, but specific professional advice should be taken before relying on it to take action.