Remuneration... what is the best way to pay myself?
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Remuneration...what is the best way to pay myself?
26/05/2023.
We are often asked by the director and shareholders of companies, ‘what is the best way to pay myself? It is not a straightforward question to answer and there is no one size fits all approach.
We are often asked by the director and shareholders of companies, ‘what is the best way to pay myself? It is not a straightforward question to answer and there is no one size fits all approach.
Directors will be in different stages of their lives and have different income requirements. Circumstances will also differ for their companies.
What are my options?
You can pay a salary through PAYE (Pay As You Earn). This will attract income tax with rates from 19% to 47% (taking account of Scottish tax rates as rates applying elsewhere in the UK). The salary will also attract National Insurance (NI) payments for the employee and the company.
Employee benefits. These are employment benefits such as a company car or private medical cover. These run either through your company payroll or are reportable on a P11D at the end of the year, they also attract income tax and NI for employee and the company.
Your company can pay shareholders a dividend. This is paid from post-tax distributable profits and is taxed at dividend rates from 8.75% to 39.35% so at a lower tax rate than a salary and without NI costs. This is to acknowledge that distributable reserves have already been subject to Corporation Tax.
You may also have income from other sources such as rental income or interest that need to be considered when looking at applicable tax rates and individual circumstances.
Also let’s not forget to utilise the available tax allowances we all have, such as personal allowance, dividend allowance and savings allowances.
Non-tax considerations
There are important things to consider in addition to the incidence of tax (it may not always be the right answer to pay as little as you can):
- Keeping your NI contributions up to date for when you want to claim your state pension or other means tested benefits.
- Making sure you have enough relevant earnings if you want to make personal pension contributions.
- Spreading your tax liability throughout the year – do you want one large bill?
- Do all shareholders want the same thing? – dividends are paid as an amount per share not per person.
- Who will ensure that the board meetings are organised, the dividends are declared pre-year end and the paperwork completed?
- Recently directors who paid themselves a small salary did not benefit from the Coronavirus Job Retention Scheme as it did not take dividends into account so there may be other considerations we can’t even predict.
So, it’s a tax adviser’s answer...it depends!
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