Directors salaries are clearly of significant importance in any company’s finances. A director is entitled to take a salary, or to take a dividend if they are also a shareholder and a company is in profit.
However, a limited company or limited liability partnership is a separate legal entity to the business owners or directors, and no matter the size or type of company, it is not appropriate for a director to simply take money out of the company without accounting properly for it, both in the company’s records, and in returns to Her Majesty’s Revenue & Customs (HMRC).
Directors may take a salary via the Pay As You Earn (PAYE) scheme in the same way as any other employee. To do so, the director and the company must be registered with HMRC.
- National insurance contributions (NIC) may also need to be deducted depending on the salary level.
- many directors, particularly those running small family owned companies, will take a salary up to the NIC threshold, or up to the annual tax-free personal allowance threshold for PAYE, and take the remainder as declared dividends in order to benefit from the tax allowances available.
If you are a director and business owner, you might benefit from speaking to an accountant to decide on the most tax-efficient way of being paid as a director, if you have not already done so. At Francis Wilks & Jones we work with a variety of external experts and can put you in touch with a recommended accountant if required.
Directors’ salaries and service level agreements (SLA)
An SLA is a contract between a director of a private company, and that company, setting out the parameters of the directors role, similar to an employment contract with an employee.
It is a good idea for all directors to have an SLA with their company to avoid misunderstandings and to ensure that all parties know what their expectations are in terms of salary and benefits and also what they expect from the director in terms of conduct.
An SLA should set out full details of reimbursement of salary and benefits, such as medical insurance and life and disability insurance as well as details of where the director will work, holiday entitlement, sickness entitlement, and potential constraints on the director when leaving the company, amongst other relevant agreements.
At Francis Wilks & Jones we frequently advise companies on SLAs, and can chat through your requirements with you. Contact our team today to discuss.
Taking dividends from available profits
Directors are often shareholders as well as directors, particularly in small to medium sized companies. A shareholder is entitled to take a dividend from profits of the company, which will be calculated according to the percentage ownership represented by the shares they hold. Dividends can only be declared and paid on profits after corporation tax is paid. Individual shareholders will pay a dividend tax on any amounts received above £2,000.
- it is necessary to hold a board meeting for a dividend to be declared.
- a record must be kept of this in the company’s books and records by way of minutes.
- this is the case even with a sole director and shareholder company.
- a record will be required if this is ever requested by a later liquidator to look at the decision-making process in an insolvency situation, or by HMRC to confirm tax due.
Directors’ loan accounts
It is common, especially for small or medium enterprises, for directors to take money from the company during the course of the year. If this is not taken as salary via PAYE, or declared dividends, it must be recorded in the director’s loan account on the company’s balance sheet. Whilst this is fairly standard for owner/directors, there are potential problems for directors and the company if this is not dealt with properly as tax on directors loans must be accounted for properly.
At Francis Wilks & Jones our company law experts can advise and assist you with regard to what is reasonable and possible for directors in terms of taking money out of the business, and how to account for these properly within the company’s books and records, and tax returns.
- we frequently act for companies and directors in providing suitable SLAs, and can provide you with expert advice to enable you to reach agreement on the most common issues addressed in SLAs, and to cover bespoke points for your company situation.
- companies that have an SLA in place with their directors from the start can avoid a lot of time and costs in due course when misunderstandings occur over each party’s expectations.
Please call any member of our team for your expert consultation today. Alternatively email us with your enquiry and we will call you back at a time convenient for you.