Many small business owners get confused over paying themselves from the company. The topic of director salary and dividends for small business owners is admittedly complex. In this article we will clarify some of the main aspects of this matter that you should know.
As the founder of your business when you register it as a limited company, you are its shareholder as well as director. Then, as shareholder and director of your limited company you will usually also be employed in your company and take a salary from the business using PAYE (Pay As You Earn) like any other employee. To do this, you will need to run payroll and file a return to HMRC each month.
Depending on your circumstances and if you have other income sources, you will have your salary set at an optimal level in order to be tax efficient, in other words to not pay more taxes than you should.
For most people, if you have no other source of income, you will take from your limited company a mix of low salary and high dividends. At LAS Accounting, we will look to establish the right mix for your personal circumstances during our initial meeting, so you are set up in the best way from the start. We will then tweak it as or if your circumstances change, so that you will continue to make use of your money in the most tax efficient way.
Once you take on employees, they will also need payroll running to get their wages each month. You will need to deduct from their agreed wages tax and national insurance at the right rates, as well as enrol them in an auto-enrolment pension (if eligible) and make the necessary deductions on that front, as this is obligatory by law for you as employer.
You will also need to ensure you are paying your employees at least the National Minimum Wage, which has been changing almost every year over the past few years. The National Minimum Wage has to be strictly applied as this is required by law.
At LAS Accounting we are able to take care of your payroll, ensuring the right deductions are made at the right time, returns are filed on time and the regulations for auto-enrolment are complied with. We will also ensure that the Employment Allowance is applied correctly, which is very important to you as business owner because it offers you substantial credits towards your tax bill (this means you pay a lot less tax as an employer).
We are also able to administer payrolling of benefits, redundancy pay, statutory sick pay, statutory maternity pay and other statutory leave, and other payroll related payments and deductions. These are very meticulous and need to be done properly.
If you are not yet registered with HMRC for PAYE then we can also get you registered and all set up ready to run monthly payruns.
How does the director salary and dividends for small business owners work?
In brief, as a director of your limited company, there are three different ways that you can choose to pay yourself: salary, dividends and pension contributions. Directors pay themselves in some combination of salary and dividends, often supplemented by pension contributions from the company. Finding the right combination for you will depend on a number of factors, such as: the profits your company makes, how much you want to reduce your personal tax bill, how much you want to reduce your company’s tax bill and whether you want to retain certain state benefits (e.g. maternity benefits or state pension).
There are benefits of taking a salary from your company:
- You build up qualifying years towards your state pension
- You can make higher personal pension contributions
- You can retain maternity benefits
- It can be easier to apply for things like mortgages and insurance policies such as critical illness cover
- You reduce the amount of corporation tax that your company pays (as salary is an allowable business expense)
- You can take a salary even if your business makes no profit
However, one disadvantage of taking a salary is that it attracts higher rates of income tax than a dividend does. In order to solve this problem and make sure you do not pay more tax than you should, your salary will be kept under the personal allowance threshold, which at the moment is £12,570 in the 2022/23 tax year. However, you will have to pay NICs (National Insurance Contributions) if your income passes the NIC Primary Threshold (currently £12,570). In addition, employer NICs become payable on any employee earnings above £9,100.
Note that in order to build up qualifying years for the state pension, your salary must be at or over the NIC Lower Earnings Limit (currently £6,396). Some directors therefore set their salaries between the Lower Earnings Limit and the Primary Threshold, so as to keep their state pension but avoid paying NICs.
How much dividends can I take from my business ?
Many directors choose to take the majority of their income in the form of dividends, as this is usually more tax-efficient. A dividend is simply a share of the company’s profits. Profit is what is left over after the company has paid all its liabilities, including taxes. If there is no profit, then no dividends can be paid.
There are clear benefits of taking dividends from your company:
- Dividends attract lower rates of income tax than salary
- No NICs are payable on dividends (neither employer’s nor employee’s)
By taking most of your income in the form of dividends, you can significantly reduce your income tax bill.
You also have a tax-free dividend allowance, which is in addition to your personal allowance. In the 2022-2023 tax year this allowance is £2,000. This means that you can earn up to £14,570 before paying any income tax at all.
How can LAS Accounting help ?
Whether it is director only or a larger payroll with employees, we have got you covered. We use Birghtpay to run the payroll, file the returns with HMRC and, where applicable, file the pension return with the pension company. Your employees will be invited to download the Brightpay app where they can view their payslips as well as update their personal details. As we mentioned from the start, the topic of director salary and dividends for small business owners is quite complex.
Once payroll is run, the relevant costs and payments due to HMRC and pension company are posted straight into your accounts on Quickbooks, ensuring that payroll costs are included automatically in your profit and loss reporting.
We will also email you to confirm payments due to yourself and employees, as well as what’s due to HMRC, and when!
And at the end of the tax year we will issue each employee with their P60 via email, and we can also prepare P11Ds as required for benefits in kind such as cars, medical insurance and so on.
LAS Accounting Ltd can help you with each and every one of your accounting needs, saving you time and money to focus on doing what you do best – running and growing your business. We can also help you understand your business finances, monitor your cash balances, plan for future tax liabilities and pinpoint trends to help support important business decisions. Now may be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the accounting advice you need.
Don’t hesitate to get in touch for any further enquiries at: email@example.com