Tax for company directors can sometimes seem a bit confusing because they often have several different sources of income. The problem is that these different forms of income are subject to tax, but usually in different ways and at different rates.
It means that as well as taking care of the Company Tax Return for the business, you might also need to register for PAYE for any salaries, and maybe even register for Self Assessment. Phew!
Just to make things really confusing, you also might not need to, so in this article we’ll explain what company directors pay tax on, and how to go about setting everything up correctly.
Do directors need to register for Self Assessment?
Self Assessment is used to report untaxed income, rather than what you do for a living, so you don’t automatically need to register just because you’re a company director.
Company directors will need to register for Self Assessment if they receive taxable income and haven’t yet paid any tax on it.
For instance, if you’re a director and a shareholder in the company, you might pay yourself dividends. You’ll need to register for Self Assessment to tell HMRC about your dividend income, and to pay the right amount of tax on it.
As a shareholder you can pay yourself a distribution of the company’s profits (known as a dividend).
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Company directors and PAYE
As a company director you’re an ‘office holder’ rather than a regular employee. This means minimum wage doesn’t apply and you don’t have to take a salary, but lots of directors do because it gives them a regular source of income.
An important rule to remember though, is that if you do decide to pay yourself a salary for the work you do as a director, the payments might need to go through PAYE. This depends on how much you pay yourself as a salary.
If it’s less than the Lower Earnings Limit (£6,396 in 2023/24) then you won’t need to register. If it’s above the limit, then you will.
What the company cannot do is pay you for holding office as if you’re a self-employed person or through an intermediary company such as a Personal Service Company (PSC).
In short, the company acts as your employer. Any income tax or National Insurance is deducted from your salary, and the company pays it on to HMRC through the PAYE system.
Do directors need to show their salary on Self Assessment?
The quick answer is yes. If you do need to submit Self Assessment, it will include sections for each source of income (and how much tax you might already have paid on it, so you won’t be taxed twice). This is so that your total amount of income for the year is taken into consideration, so that you pay the right amount of tax.
What do dividend payments have to do with directors and Self Assessment?
Dividends are paid from the after-tax profits of the company, so this means that they have already suffered some taxation. As a result, dividend tax is a lower rate than income tax (which takes us back to what we mentioned earlier about directors being tax-efficient when they pay themselves).
Dividend tax rates
Dividend Tax Rate
Basic rate taxpayers pay the dividend ordinary rate
Higher-rate taxpayers pay the dividend upper rate
Additional-rate taxpayers pay the dividend additional rate
The tax due on dividend payments is paid through Self Assessment rather than being taxed at source like it is for a director’s salary.
It’s a good idea to put some money aside from your dividend payments so that you have cash to pay your tax bill! This is something that sometimes catches people out because they assume that as they are paying PAYE on their salary, then all their tax is taken care of (it isn’t).
Self Assessment and directors’ pensions
The subject of pensions can be hugely complex, but because pensions attract tax relief there are some aspects which crossover into Self Assessment. This is because paying into a pension means that some of the money you would normally pay as tax can go into your pension instead.
What makes it particularly tricky is that there are so many different types of pensions in existence, and this affects the tax. For instance, some pensions are paid:
As part of the PAYE process, so there won’t normally be any issues with tax
Post-tax, in which case your pension provider will add back an amount to make up for the tax you’ve already paid
Pre-tax, in which case they won’t add anything back
It’s strongly advisable that you contact your pension provider to check what type of scheme you are on, to ensure you enter information in your Self Assessment correctly. Otherwise, you may find that you end up paying too much tax, or not enough.
Benefits and gifts
If you are a director of a company, then you are entitled to some benefits free of tax. You do need to be careful though because there are lots of rules that determine what is and isn’t tax-free.
In general, if a company pays for something that you use personally (called a benefit in kind or BiK) then it will be taxable. On the other hand, there are some things the government feels should be incentivised, and as such won’t attract tax.
For example, your company can pay up to £500 per year for pensions advice, provide you with a mobile phone for personal and business use, and pay you an allowance for working from home. If you have other benefits, such as a company car, then you may well have to include them on your tax return. Your employer should provide you with a copy of the information they send to HMRC, called a P11D.
Director’s Loan Accounts and Self Assessment
If you take money out of your limited company which isn’t a salary, dividend, or to reimburse you for an expense, it’s usually considered to be a director’s loan. This is fine, as long as the loan account is repaid within 9 months after the end of the company’s financial year. If it isn’t, HMRC see it as you taking money out of the business for yourself, so you’ll need to pay tax on it.
Directors and Self Assessment – what should you do?
So, if you do need to register for Self Assessment, the first piece of advice is to make sure you do it as soon as possible. This will ensure you don’t face any penalties for not completing a return. Secondly, make sure you save EVERYTHING. Set up a Self Assessment folder on your computer, or ideally in a cloud storage location (like Pandle) so you don’t lose it if your PC goes into meltdown.
Save hard-copy invoices, receipts, and documentation, and take a photo or scan them and save them to your online folder or cloud storage. Some software providers let you attach the document to the particular transaction record it relates to, which makes things even easier.
We can promise you that doing it as you go along is so much easier than scrabbling around on tax deadline day trying to find things. Have a chat with a professional advisor but do this well before the end of the year as the more time they have to organise things, the better off you’ll be.
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About The Author
I'm an AAT and ACA qualified Chartered Accountant with over 13 years experience working with businesses, contractors and sole traders. I also love watching live music, and quizzes!
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