If you are a company director, you can pay yourself a salary for your role. Here we look at the self assessment process, calculation of tax and payments on account for directors of small owner managed companies.
It depends on how you require your funds. If you take a salary through your company this will be treated as normal income, and the usual 20%, 40% and 45% tax rates will apply.
If you make pension contributions from the company into the director’s personal pension, then this will be an allowable expense to the company and will not be taxed on the director at that time (although will be taxable when the pension is drawn) so many directors see this as an attractive option.
From April 2016, there will be a new dividend regime in the UK.
The rules before April 2016 meant that a director could pay himself a small salary from his company (up to the personal allowance or less usually to avoid paying high amount of national insurance) and then effectively fill the remainder of their personal allowance and the full basic rate band with dividends. These dividends would then get taxed at 0% which made dividends a very attractive option for small companies. Remember, dividends do not attract national insurance either!
Where dividends exceeded the basic rate band, the effective rate was 25%, which is better than 40% (which is the self employed equivalent).
Under the new regime, everyone will be entitled to a £5,000 dividend allowance which means the first £5,000 of taxable dividends will be taxed at 0%. Any dividends in excess of this will be taxable at new rates (7.5% in the basic rate, 32.5% within the higher band and a new 38.1% rate where dividends fall in top band).
This is not good news for the small company. The tax bill for a director fully utilising his basic rate band with dividends will increase by about £2,000 under this new regime.
Remember dividends are not allowable expenses and so the company does not get relief on them!
Benefits are an alternative way of remunerating directors and extracting funds from a company. The downside is that most benefits such as company cars and vouchers attract tax and national insurance. Some benefits can be provided to employees and directors tax free such as an employer provided mobile phone and these are advantageous from a tax perspective.
Income tax is payable on 31 January following the tax year. You may be required to make payments on account.
Let’s say it is 2016/17 and you make payments on account each year.
Once the actual tax liability is calculated for 2016/17, you will deduct the payments you have already made and pay or reclaim the difference from HMRC. These deadlines are only relevant for the director’s personal tax liabilities.
There are different deadlines for filing the company accounts, paying the corporation tax, reporting benefits in kind, paying national insurance etc. Most companies will work with an accountant to ensure they are making the correct payments on account.
This page will give you an overview of the National Insurance obligations of a director of his/her own company. It will consider both the liabilities of the director and the liabilities of the company (the employer) itself.Read more
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