Paying company directors isn’t as straight forward as an employee. It is not as simple as getting a pay slip each month.
So, how can you pay company directors?
Paying company directors via salaries, expenses and benefits is the easiest. The company needs registering with HMRC as an employer. Directors pay income tax and national insurance contributions on any salary received. The company must also pay the NI contributions. Directors can also claim reasonable business expenses.
Many people use their own cash to start a business – you are effectively making a loan to the limited company. This isn’t a salary or a dividend but considered a loan. It will not then be subject to the tax implications of a salary or a dividend.
If a company makes a profit, it can pay dividends to directors. The company cannot pay more in dividends than the profit it has made for the current or previous years. To pay a dividend you must hold a directors’ meeting to declare the dividend officially. Make sure you keep minutes of the meeting even if you are the company’s only director.
One of the attractions of forming a limited company is the reduced level of tax to pay on dividends. Many directors take a minimum salary (up to National Insurance limits) and draw the rest of their pay as dividends.
However, this strategy is not without its risks:
- Paying a salary increases the level of contributions paid into a personal pension. If you want to receive a dividend and make a pension contribution, consider setting up a company pension scheme.
- Whilst salaries can be allocated to directors at different rates, shareholders are entitled to a dividend at a fixed rate per share. However, if there are non-working shareholders in the company, it is possible to create different classes of share. This prevents them receiving the same dividend rate as directors working full time.
- Dividends can only be paid on profits made by a company that year, or undistributed profits from previous years. However, salaries can be paid even when a company makes a loss. Although
- PAYE does not have to be paid on dividends, there are a number of procedures that must be followed for the dividend payment to be lawful.
- Paying a salary can reduce the company’s corporation tax bill; paying a dividend will not.
Can I pay different amounts to directors?
The simple answer on this one is yes! Shares are what show ownership of a limited company. Some shareholders might own more shares than others, which means that they own different percentages of the business.
The percentage of shares owned are used to calculate dividends. Someone who owns 30 per cent of a business’ shares will usually receive 30 per cent of the profits, for example.
This ensures that shareholders are getting a proportional amount according to their investment in the business. But, there are also different classes of shares, called alphabet shares, which can make things a bit more complicated if the company uses them.
The term ‘alphabet shares‘ describes different classes of shares limited companies can issue. Different rights are assigned to each class of shares (A shares, B shares, etc). These could be voting rights, or the percentage of dividends that the shareholder of that particular class of share is entitled to.
Remember that for information about what directors need to know, visit the HMRC website.
If you need are a limited company and want help understanding the best option for paying company directors in your business, contact us today.