Once you’re a director in your own limited company, the usual way to pay yourself is through dividend payments.
Dividends are paid to shareholders (that’s you) when the business makes profit. And because you pay tax on the profit through your corporation tax (currently 20%), they’re usually a more efficient way to take money out of the business and put it in your pocket.
Changes to the way dividend income is taxed came into force in April 2016, which now makes dividends a less attractive option for you as a director. If you’re earning over the new £5k allowance, you could be taxed as much as 38.1% on that income – and this is on top of the 20% you’ve already had taxed on your profits!
So, what should you do? There are other options outside of dividend payments, including paying into ISAs or pension schemes, but you’ll need to do some quite complex tax planning to make this work efficiently (come and talk to us if you do find yourself in this boat).
Understanding your dividend payments
Dividends are only payable out of post-tax profits. So if you’re not yet turning a profit and need to take out funds, you’ll have to do this via a salary not dividends.
The same level of dividend must be taken by all your shareholders of the same share class, unless you’ve made a specific agreement for certain shareholders to waver their dividends. This is something to think about if you have some shareholders who run the company and some who aren’t actively involved. This is particularly relevant if you’re looking to raise venture capital investment.
If your business is carrying out research and development (R&D) qualifying activities then you’re better off paying your directors via a salary than dividends. Only payroll salaries are considered in an R&D claim, not dividends, so paying salaries will increase the scope of your claim.
Qualifying for the state pension
It's worth noting that you can pay yourself a wage as a director and still qualify in later life for the state pension. Directors will usually do this by keeping their direct wage below £8k per annum – Find out more about the income threshold for director's here
If you want your directors’ pay to be as effective and tax-efficient as possible, give us a call on 01454 300 999 or drop an email to email@example.com