Directors’ Fees

WHAT ARE DIRECTORS’ FEES  AND How ARE THEY TAXED?

Directors' fees are payments from your company to you for your services as a director. They are liable to PAYE and NIC deductions, but in terms of your company expenditure they need to be accounted for separately. It is your choice whether or not to take a director’s fee, as it is equally possible to provide your services free of charge. If you are the sole director this is your decision. If there is more than one director the decision should be a joint one.

Directors' fees are tax-deductible expenses for your company. As a result, providing it is profitable, the company saves Corporation Tax on directors' fees it pays. They are however, taxed under the Pay As You Earn (PAYE) system. You will be liable to National Insurance on the directors' fees you receive above the thresholds and for Personal Tax on the directors' fees you receive above the personal allowance for the year.

Setting a Directors' Fee for 2019/20

1) Directors Fee set at the annual  NI threshold of £8,632 for sole directors

Why  have we recommended this amount?

In the previous years,  the lowest sensible salary was linked to the NI contributions threshold and  for 2019/20 this will be £8,632.

For sole directors, this is equivalent to £166 per week or £719.30  per month.

This amount utilises some  of  the  personal allowance  of £12,500 so there is no income tax payable – nor  is there any Employers or Employees NI, but you would still ensure you get your qualifying year for the state pension entitlement.

In order to qualify for the full state pension  and other social security benefits, though, you need to have earned more than the ‘lower earnings limit’ for a period. This period varies benefit by benefit and, in the case of the state pension, can be a very long-term calculation. The lower earnings limit is £118 per week for the 2019/20 tax-year (which commences on 6 April 2019).

An important point to note is if you fix a directors’ fee below  £118 per week  and do not have any other income subject to National Insurance, this may affect your eligibility for future benefits.

2)    Directors Fee set at Personal Tax Threshold of £12,500 (if there is more than one employee throughout the tax year)

Why have we recommended this amount?

You can apply for an allowance reducing the Employer’s NI liability payable by up to £3,000, but only if there is more than one employee throughout the year.

Therefore if you have more than one employee, this means you can receive £12,500 free of income tax and only incur a small amount of Employees NI (12% of the amount above £8,632). Although  you pay a small amount  of  Employees NI (£464) the corporation tax relief gained (£735) on the increase in salary  is greater and therefore  more tax efficient than paying a lower salary to avoid NI.

But if you are not eligible for relief to claim the allowance, this will increase your Employers Liability to £534, removing the benefit of paying the salary to your personal  tax threshold, as the combined Employees and Employers NI would be  £998, which is greater than the corporation tax relief.

3)    Directors Fee set at different  recommended  amounts

Why  have we recommended  setting your Directors Fees at another  amount?

Theoretically you can pay yourself any fee you wish providing the company has sufficient funds to pay both you and the associated PAYE and NI.

There are certain circumstances when it may not be advisable to set a directors' fee at £166 per week, for example:

  1. You are working on an assignment that is captured by IR35. In this scenario you will be in receipt of income that has been subject to Income Tax and National Insurance.
  2. If you are in receipt of a pension/state pension that makes use of your personal allowance and you have been advised that you have a full NI contribution record. You can pay yourself by way of dividends only.
  3. If you will be in receipt of other employment income during the year that makes use of your personal allowance and NI thresholds. Again, you can pay yourself by way of dividends only.

If you are in between assignments and are claiming Jobseekers Allowance you should reduce your  director’s fee to NIL for that period. The receipt of jobseekers allowance contributes to your National Insurance record and taking a directors' fee may affect your claim for Jobseekers Allowance and your Personal Tax liability.

The effect of a Directors' Fee on your pension

A directors' fee is considered to be ‘earned income’ for pension purposes. Any personal pension contributions that you make are limited to 100% of the directors' fees that you receive in any one tax-year (plus any other employment income you may receive in that year). If you want to pay more than this into a pension you would either need to increase your directors' fees, or consider a mixture of personal and company contributions.

 

 

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