Generally the best way for a Director / Shareholder to be remunerated is a combination of salary and dividends, but this should be reviewed on an individual basis.
There are three ways you can be paid as a Director / Shareholder.
Here is a summary of these three options and the associated advantages and disadvantages of each:
OPTION 1: SALARY
Paying a salary is usually the most expensive option for your company as it absorbs:
- The net cost paid to you.
- The National Insurance Contributions (NICs) made on your behalf (however, if eligible, your business can reclaim up to £5,000 of this annually).
- The pension contributions made on your behalf.
The cost to the company will fluctuate based on the amount you are paid.
At present the full annual personal allowance is £12,570 (this will reduce by £1 for every £2 of your total income from all sources that is in excess of £100,000).
After this your salary will be taxed at the following rates:
|Up to £37,700||20%|
|Between £37,701 and £150,000||40%|
Please note that if you are making personal pension payments or personal charitable donations under Gift Aid, these will increase your basic rate band.
In addition, the employees and employer’s Class 1 National Insurance that will be payable will be:
|Up to £9,100||0%|
|Up to £9,880||0%|
|Between £9,881 and £50,270||13.25%|
With effect from 6 April 2023 1.25% of the National Insurance will be replaced by the Statutory Care Levy.
The benefits of taking a salary are as follows:
- As long as your business has cash you can be paid, this cost will be treated as a business expense, reducing your profits and in turn reducing your corporation tax payments. If the business is loss-making, these losses can be carried forward to be utilised against future profits (reducing your tax liability), or may be able to be carried back to be utilised in the previous accounting period.
- The tax is dealt with at source.
- Administratively it is easy to plan to take a salary – you will get the same amount monthly.
- You will continue to contribute to National Insurance, which will entitle you to your state pension once you reach retirement age and possibly other state benefits in the meantime.
The disadvantages of taking a salary are as follows:
- The cost to the business is high.
- There are more tax efficient ways of taking money from your company.
OPTION 2: DIVIDENDS
A lot of Directors choose to remunerate themselves via a combination of a basic salary (between the lower and secondary earning thresholds for NIC purposes) and dividends, rather than an annual salary, as this is more tax efficient.
As a Director of a limited company you are able to do this as, in general, the National Minimum Wage rules do not apply. By taking salary in this way your National Insurance record will continue to be credited with your contributions entitling you to your state pension when you retire.
The current dividend tax rates after your personal allowances are as follows:
|Up to £2,000||0%|
|Between £2,000 and £37,700||8.75%|
|Between £37,701 and £150,000||33.75%|
The advantages of taking dividends are:
- It can be cheaper than taking a salary.
The disadvantages of taking a dividend are:
- Your company needs to be making a profit to be able to pay dividends.
- Your company will still need to have the cash to a pay a dividend.
- You will need to complete an annual Self Assessment tax return and the tax liability relating to these dividends will be due in January and July of each year. The first year’s tax liability will be higher, as you pay the tax owed on money taken and payments on account of 50% of the previous year’s liability in January and July. This additional payment will be held on account. Read more about tax payments on account here.
- Dividends will not reduce your company profits as these are not deemed a business expense. Therefore, this will have no effect on the corporation tax that will be payable by the company. The current corporation tax rate is 19% but this will increase to 25% in April 2023, unless your profits are less than £50,000 in which case your corporation tax rate will remain at 19%.
OPTION 3: DRAWING AGAINST YOUR DIRECTOR’S LOAN ACCOUNT (DLA)
Your Director’s Loan Account is an account in the company that reflects the money you have lent to your company and money withdrawn from the company as ‘drawings’. Money introduced can then be withdrawn tax-free at a later date.
You need to have invested personal cash into the business to be able to withdraw it.
Benefits of drawing against your DLA:
- You can withdraw money lent to your company tax-free, as the money being taken is effectively personal investment being recouped.
Disadvantages of drawing against your DLA:
- The company needs to have the cash for you to withdraw it.
- There could be tax implications for both you personally and the company if the money withdrawn exceeds the amount originally invested.
If you would like to discuss any of the above options, please contact the Clear Vision team who will be happy to assist you.