Remuneration planning for Company Directors
You setup a company and you are working for your business. Sales are in and you are making a profit, but not seeing any benefit by working for yourself? It is almost as if you are an employee in someone else’s company.
It sounds like you are not aware of the various tax efficient ways of withdrawing money, but we can walk you through them.
1. Director Loan Account. If you setup a limited company, you and the company are considered two separate legal entities. This means that any transactions between you and the company need to be recorded in an account called "Director Loan Account” (DLA).
When you start, is very likely that the vast majority of business expenses incurred are self-funded. The transactions between you as a Director and the Company should be recorded in the DLA. This means when you have enough funds, you can withdraw the amount you put in, without incurring any Income Tax and NI.
However, we strongly recommend that you don’t get into a position where you owe the company money and the account becomes overdrawn. An overdrawn director’s loan account is where you, as a director, have taken money out of the company, that is not classed as a dividend or salary and the figure exceeds any money you have put into the company.
Having an overdrawn DLA can create additional tax liabilities and we recommend talking to your accountant about it.
2. Pay As You Earn. The most common way of paying yourself is through PAYE. For this you will need to register with HMRC and depending on the level of income, pay Income tax and National Insurance contributions.
Considering all the taxes and allowances together, the most tax-efficient salary for a limited company director depends on whether they’re a sole director, or there are more people in the business.
- The optimum salary for a sole director in 2022/23 is £9,100 per year ( £758.33/month )
- The best salary, if there are two or more directors, is £11,890 per year (£823/month from April 22 to Jun 22 and £1,047/month from July 22 to March 23) or using the Annual NI calculation method, you can spread the salary out over the year at £992 per month.
This is because a Sole Director cannot claim Employment Allowance, so setting the salary at this rate means they will not incur employer’s NI. However your salary will still contribute towards your entitlement to future state pension and benefits.
Ok, so now you know how much you can take out in a tax efficient way but is this sufficient for your monthly outgoings? Well, let’s look at the third option,
3. Dividends. These are payments made from the company’s profit (after you considered any Corporation Tax due) to its shareholder(s). The payments depend on the percentage each shareholder has in the company.
Dividends are tax free up to £2,000. Anything over this amount and up to £37,699 is taxed at 8.75%( 7.5% + 1.25%), from April 2022.
By taking a combination of a small salary and higher dividend payments, you could pay significantly less personal tax than you would as a sole trader and really see the benefit of working as a director in your own company.
4. Pension contributions. Lastly, you can contribute into a pension and get 100% tax relief as an allowable expense. Your contributions are tax-free as long as the amount falls under the annual allowance of £40,000 (2021/22 tax year).
Pension decisions are often complicated, and require careful consideration. We recommend speaking with a financial advisor for personalised advice before you make any contributions.
We acknowledge that the above might still be a bit too much information or it might not apply to you, as circumstances differ, but that is why we are here.
We can always talk about which scenario suits you best. This is what we are here for and as usual, you can contact us for more details at firstname.lastname@example.org.
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