As a director, should you pay yourself a salary?
The directors of a company are responsible for running it properly. They must ensure that the company complies with the law and acts ethically. In addition, they are responsible for managing the company’s finances. This includes paying themselves salaries.
In most cases, companies don’t have to pay directors a salary. But there are exceptions. For instance, directors must receive a salary if they are required to do so under law. If the articles of association state that directors are entitled to a certain amount of remuneration – such as a fixed annual fee – they must be paid that sum.
If directors aren’t required to be paid a salary, they shouldn’t either. However, some directors choose to take home a salary because they want to motivate themselves to work harder. A salary makes sense if directors perform additional duties beyond those listed above.
Income Tax personal allowance
The personal allowance will increase from £11,850 to £12,500 next month. This means that anyone earning up to £50,000 a year will no longer have to pay income tax. However, there are certain circumstances where people might still pay less than the standard rate. These include those who make very low incomes, or whose earnings come entirely from self-employment.
If you earn under £16 000 a year, you may qualify to receive an extra Personal Allowance of £1320. You must meet specific criteria to claim it, including having paid National Insurance contributions throughout the whole year.
The main requirement for NI (for employees)
The government announced today that it plans to raise the Primary National Insurance (NI) threshold for employees to £9,880 per annum from April 2017. This will mean that employers will no longer be able to use zero hour contracts to avoid paying NI contributions.
This change will apply to both new and existing contracts, meaning that employers must pay NI contributions on behalf of workers where there are either fixed terms or regular working patterns. Employers will still be able to offer zero hour contracts to their existing workforce, however, as long as they meet certain criteria. These include having a written policy on flexible work practices, offering training and development opportunities, and providing adequate notice periods for changes in employment status.
Employees will continue to be exempt from NI contributions during maternity, paternity, adoption and compassionate leave.
The announcement follows on from the introduction of a new national living wage of £7.20 per hour plus £1.70 per hour for apprentices aged 25 and under.
More information about the new rules and how they affect you can be found here.
Secondary Threshold for NI (for employers)
The Secondary Threshold for National Insurance Contributions (NICs) for employees working in the UK has risen from £9,880 per annum to £12,570 per annum. The increase takes effect on July 5th 2019, meaning that workers earning up to £12,570 will now owe income tax and national insurance contributions.
Employees whose annual earnings are below the secondary threshold do not have to pay income tax or national insurance contributions. They must still make payments into the Social Security system, however.
Whether or not you can get the Employment Allowance
The qualifying income limit for people aged 65 and older is set to increase from £8,105 to £9,880 next April. This follows a decision by the government to raise the threshold from £7,475 to £8,105 in January 2018. If you are earning less than this amount, you could still receive a State Pension. However, you will need to work longer to qualify. You will need to have paid National Insurance Contributions for at least 35 years, rather than 30 years. This applies whether you are working full time or part time.
A director’s salary must exceed this figure before he or she qualifies. A director who earns over £9,880 and under £11,000 is eligible for the State Pension. Those earning over £11,000 but under £13,000 are eligible for a “top up”, while those earning over £13,000 are automatically entitled to the State Pension.
Who can get the Employment Allowance?
The Employment Allowance is a tax relief given to employees whose employer pays National Insurance contributions. In theory, it is meant to help offset the cost of paying into the social security system. However, there are some exceptions to this rule.
One of those exceptions is where an employee works for a limited company. A limited company is one that does not pay corporation tax. Instead, profits go to shareholders and dividends are paid out to investors. If you work for a limited company, you do not qualify for the Employment Allowance.
Another exception is where the employee works for a sole trader. Sole traders operate under the same rules as limited companies. They too do not qualify for the allowance.
If you think you might fall foul of either of these rules, speak to us today. We can advise you on how best to proceed.
What is the best way to pay taxes on a salary in 2022/23?
The government announced a number of changes to the way employers calculate National Insurance contributions (NICs) for employees. These include increasing the threshold for qualifying for the highest amount of tax relief from £1,500 to £2,000 per annum. This change will come into effect from April 2020.
In addition, employers are now allowed to reclaim up to an extra 25% of NICs paid on behalf of directors. However, there are some conditions attached to this perk:
• The director needs to work full-time hours;
• They cannot receive a salary above £80,000;
• Their employment contract must state that they are employed as a director;
• They need to be registered under the European Economic Area (EEA) or the United Kingdom.
Employers who employ directors will normally be able to claim back another 25% of their NI charges. If you are unsure whether your company qualifies for this benefit, contact us today.
£9,100 (EA can’t be claimed by the company)
Companies that don’t qualify for either the Enterprise Allowance Scheme (EAS) or the Small Business Rate Relief (SBRR) can use this option. However, it’s important to note that you won’t be able to claim the EA unless your annual turnover doesn’t exceed £150,000.
If you’re eligible for one of those schemes, there are some other benefits to choosing Option 1. HM Revenue & Customs (HMRC) will accept an application from companies claiming this option without having check its details against any record. They’ll also accept applications from businesses where the owner lives outside the UK.
There are other benefits to choosing Option 2 – the Standard Application. For example, HM Revenue & Customs will accept an application from businesses whose owners live overseas. If your business qualifies for the SBRR scheme, HMRC will allow you to apply online.
Frequently Asked Questions
Why should I give myself a salary as a director and dividends?
As a director, you’re effectively an employee of your own company. You don’t receive any benefits like sick pay or holiday pay, but you do receive a monthly salary. Because you’re an office holder, you’re also subject to employment law and must comply with certain conditions in terms of working hours and rest breaks.
However, there’s one very important difference between being an employee and being a company director: you’re responsible for paying NICs on your own salary. If you earn £50,000 per annum, you’ll pay around £1,200 in NICs each month. In addition, your company pays corporation tax on your salary, and you’ll also pay national insurance contributions on your own salary.
There are ways to reduce the amount of taxes paid on your salary, however. For example, you could take a lower salary, or pay yourself less money each month. Or you might decide to give yourself a larger salary, but pay yourself dividends in lieu of wages.
The main reason why we recommend paying yourself dividends rather than wages is because it allows you to avoid having to pay NICs on your salary. However, there are some downsides to doing this. Firstly, you won’t receive any benefits like holiday pay, sick pay, or even basic statutory redundancy payments. Secondly, you’ll be liable for VAT on your dividends. Finally, dividends aren’t taxed, so you’ll lose out on any potential tax savings.
What effect does the NI Employment Allowance have on the pay of a director?
The Employment Allowance allows companies to claim back money spent on paying National Insurance contributions (NICs). If you’re a director, it could mean a bigger paycheck.
In 2022/23 eligible employers will be able to claim up to £500 per person in order to cover the cost of NICs. Employers can apply for the allowance once they’ve paid out more than £1,000 in NICs over the course of the tax year. They’ll receive a payment of 25% of what they spend on NICs, plus interest.
To qualify for the allowance, employers will need to have at least one employee, or two directors, on the payroll. The directors must not have another job that is claiming the allowance already. So, for example, if the company employs five people, and three of those employees are directors, the maximum amount that can be claimed is £250 per person.
If there are four or fewer employees, the allowance cannot be used.