A director’s salary is a good way to take money out of a company. But how much salary should a director receive? How do you give yourself a director’s salary? How do you account for director’s wages? Here we’ll explain everything you need to know about a director’s salary.
Why pay a director’s salary?
There are two main ways a small company can pay its owner managers. As directors they can receive a salary. As shareholders they can receive dividends if the company has made enough profit. Dividends are paid from taxed profits, so the company does not get tax relief on dividend payments. Whereas a director’s salary is an expense that reduces the company’s taxable profits. So the company does get tax relief on director’s salaries. So a director’s salary is a good way to take money out of a company. This is because it saves the company tax. However, there are other taxes to consider such as PAYE and NIC. So to save the most tax you need to consider how much to pay.
How much director’s salary?
The following are the amounts and rates applicable to the UK. There is no NIC to pay on director’s salaries of £9,100pa or less. Employer’s NIC is payable by the company at 13.8% of the salary exceeding £9,100pa. Employee’s NIC at 12% is deducted from the salary exceeding £12,570pa. PAYE at 20% is usually deducted on wages over £12,570pa. But this could vary depending on the director’s PAYE tax code.
So, directors’ salaries of £12,570 attract Employer’s NIC at 13.8% but save corporation tax at 19% or more. So saves the owner manager more tax overall. However, this is only if the company is profitable or is expecting to be soon. Otherwise, for loss making companies a salary of £9,100 would be best. This is because no tax is payable and it could potentially reduce corporation tax in the future. That’s because you can carry forward a company’s losses to get tax relief in the future.
The amount of salary exceeding £12,570 would attract PAYE at 20%, Employees NIC at 12% and Employers NIC at 13.8%. But it saves corporation tax at 19%-25%. The alternative is to take dividends which are taxed at 8.75% (on total income below £50,270pa). Even if a company saves tax at 25%, dividends will cost the owner manager the least amount of tax overall.
So the best salary to pay a director from a profitable company is £12,570pa. Then they should receive dividends on top of this. See How Dividends Work for more on this.
What if the company can’t pay that much salary?
The minimum director’s salary should be £6,400pa if the director needs qualifying years towards a state pension. This exceeds the Lower Earnings Limit for NIC which is the minimum required to include it on your NIC records. For a full state pension you need 35 qualifying years.
If the company doesn’t have enough profit to pay a salary, it can still go ahead and make a loss. You can use the loss to get tax relief either in the previous 12 months, or in the future.
If the company does not have enough cash to pay a director’s salary, the company can owe it to the director. There is no limit on how much the company can owe to a director, or for how long. So you can process a salary and just add it to a director’s loan instead of paying it.
How do you give yourself a director’s salary?
Unless director’s wages are less than £6,400pa, you need to process the wages through a registered PAYE scheme. The director’s company must register as an employer so that it has the two PAYE reference numbers. The company will then need to submit payroll reports to HMRC every month and every year. It must submit a payroll every time it pays employees if it pays employees more frequently than monthly.
The company will also need to provide payslips, P60 forms, and P45 forms to its employees. It also must pay HMRC every month or quarter, any deductions from wages (e.g. PAYE, NIC, Student Loans). Free or paid software is available to help companies manage their payroll. Some online accounting software comes with payroll or charge extra for it. The benefit of this is it automatically enters the payroll amounts into the accounts. We can do your payroll for you for £11pcm plus VAT per 4 payslips per month.
How to account for directors’ salaries
Your accounts need to reflect the wages processed through a payroll. This is to show an accurate profit/loss and balance sheet. If your payroll software is part of your accounting software it should be easy to update your accounts. The combined software should put all of the payroll amounts in the correct place automatically. So all you need to do is categorise the payments to wages payable and PAYE payable. Otherwise, you will need to adjust your accounts to reflect the wages.
If a company physically pays all wages there is a quick and easy way to account for the wages. However, it’s often not the most accurate. The cash method is to just categorise all of the payments to the wages or salaries expense account. If PAYE/NIC is payable you could also categorise those to the same expense account or to its own expense account. Your accountant will make any necessary adjustments when doing the quarterly or annual accounts.
A more accurate method, or when wages aren’t physically paid, is to add a journal adjustment to your accounts. You can use a journal adjustment to debit the cost of the salaries to expense accounts. A journal must balance so it also credits the amounts payable to liability accounts. Then you need to categorise the payments to the wages payable and the PAYE payable accounts. Credit unpaid director’s salaries to the directors loan account instead of wages payable.
A small director’s salary of £12,570pa is the best way to minimise the overall tax paid by small business owners. If the company has sufficient profit, it can pay dividends on top of that salary. A company will need to register as an employer. It will also need to use software to process the payroll and submit forms to HMRC. Accounts should be up to date with the salaries.
Our clients can receive personalised advice on any of this, all included in our accounts packages from £22pcm plus VAT. We can also do payroll for £11pcm plus VAT per 4 payslips per month.About Us Our Prices Instant Quote