What should you pay yourself as a Company Director?
Deciding how much to pay yourself as a company director can be a hard decision to make. There are many factors to consider, the financial health of the business, your expenses as well as the future of the business.
This blog will provide some guidance into some of the things to consider before making your decision.
Company Financials
Before setting your salary, it is crucial to assess the financial health of your company. Consider the profitability, cash flow, and future growth projections. It's important to strike a balance between paying yourself a reasonable company director salary and leaving enough capital within the business for operational expenses, growth etc.
Industry
Researching industry standards and averages for salaries can provide insight into what is similar company director salary. Look at companies of similar size, scope, and industry to see what salary range is typical. This can serve as a reference point when paying yourself as a company director.
Responsibilities
Consider the responsibilities and time commitment required of your role as a company director. Are you working full-time or part-time? Do you have additional responsibilities beyond just being a director, such as managing other employees or handling day-to-day operations? Your performance and effort towards the business as the owner should be a metric when paying yourself as a company director.
Personal Financial Needs
Take into consideration your personal living expenses, financial goals, and obligations when determining what to pay yourself as a company director. However, it's crucial to strike a balance between your needs and the financial sustainability of the business. This is often a tough trade-off to combat, whilst wanting to achieve personal financial goals, it is sometimes more lucrative to pay yourself according to your longer-term financial goals. This may include paying yourself as a director little in the short term for the growth of the business to facilitate larger drawings in the future.
Legal and Tax Implications
Consult with a legal and tax professional to ensure that your salary is in compliance with any legal requirements, such as minimum wage laws or restrictions set by your business structure. Additionally, consider the tax implications of the company director salary. The way of paying yourself as a director, whether through regular wages or dividends, can impact your personal tax liability and the business's tax obligations. Book a consultation call with one of our experts here.
Sole director vs multiple directors vs Director with employees
It is important to appreciate the different company structures that can affect your decision. We can touch on the implications here to give you some sort of direction. The diagram below is a simplified version of how your income tax is generally computed.
You should be aware that the more income sources you have the more complicated your income tax computation will become, luckily, our on-demand tax advisors would be happy to answer any specific questions to aid you.
You have multiple options for paying yourself as company director. Remember, it would be beneficial to pay yourself at least 12,570 during the tax year as this would be your personal allowance which is exempt from any tax. It would then be ideal to pay yourself from your company through dividends as the rates are lower than normal income tax rates. Note that there is a £2000 dividend allowance you can further use before you are taxed in the first band.
If you have multiple directors within the company, the same treatment as one director generally would apply. Utilising, exempt benefits can have NIC advantages as well as income tax advantages. For example, expensing your meals through the business can reduce your personal food bill as well as reduce corporation tax payable, giving you an overall tax-efficient benefit.
When you have multiple employees who are not directors, you can take advantage of the employment allowance to reduce your NIC liability as a company. You have an allowance of £5000 per employee. It would still be beneficial to pay yourself the bulk of your income through dividends.
| Taxable Bands | Income (Salary, trading, property) | Bank Interest | Dividend Income |
|---|---|---|---|
| Basic Rate Band (12,570 - 37,770) | 20% | 20% | 8.75% |
| Higher Rate Band (37,770 - 125,140) | 40% | 40% | 33.75% |
| Additional Rate Band (125,140 +) | 45% | 45% | 39.35% |
Conclusion
Deciding what to pay yourself as a company director requires careful consideration of various factors, including company financials, industry standards, responsibilities, personal financial needs, and legal and tax implications. By taking these factors into account and seeking professional advice when needed, you can ensure that you strike the right balance between fair compensation for your work and the financial sustainability of your business. Remember, it's important to regularly review and adjust your salary as circumstances change to ensure continued alignment with your business's needs and goals.