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.
How much income tax will I pay as a director?
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.
How do dividends work?
From April 2016, there is a new dividend regime in the UK.
All directors are entitled to a dividend allowance, currently £2,000 each year. This allowance is entered the relevant tax band and taxed at 0%, within this band.
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 the top band).
Remember dividends are not allowable expenses and so the company does not get relief on them! Dividends do not attract national insurance.
How do benefits in kind work?
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.
You will make a payment on account on 31 January 2016, which will be equal to half of the previous year’s tax liability.
You will make a further payment on account on 31 July 2016, once again equal to half of the previous year’s tax liability.
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.