Your guide to directors’ pay in the UK

Do you run a company in the UK, or are you thinking of incorporating your business and not sure where you stand in terms of getting paid?  

In this guide, we breakdown the main payment methods available to company directors in the UK so you know where you stand. 

Salary 

A salary is a regular payment from the company to a director. A salary is the most common method of payment for directors. 

Advantages 

• State pension qualifying years: Having a regular salary that is above the lower earnings limit means the director builds up qualifying years towards their state pension 
• Personal pension contributions: Allows for greater tax relief on personal pension contributions, as your relevant UK earnings will be higher 
• Evidence of income: Having a regular income can make it easier to provide evidence for mortgages or critical illness insurance 
• Redundancy eligibility: Having been paid a salary can mean the director is eligible for redundancy payments 

Disadvantages 

Income tax and NICs: Directors' salaries are subject to income tax and National Insurance Contributions (NICs) 

Bonus

A bonus is a one-time payment made to directors. Bonuses can be annual and may be tied to the performance of a director. Bonuses may be contractual or non-contractual. 

• A contractual bonus means that employees and directors are aware of their entitlement to a bonus, that is usually calculated based on performance criteria. A contract may also include a guarantee of an amount. 
• A noncontractual or discretionary bonus is where a company has discretion over whether a bonus will be paid and how much. 

Bonuses are subject to income tax and NICs where applicable. 

Dividends 

Dividends are payments made to shareholders from the company's profits. Directors who are also shareholders can receive dividends. 

Advantages 

Lower tax rates: The rate of tax for dividend income may be lower than those of income tax 

No NICs: No National Insurance Contributions are payable on dividend income 

Dividend allowance: Most individuals in the UK have a dividend allowance, which results in tax-free dividends of up to £500 per annum 

Disadvantages 

Distributable reserves: Dividends can only be paid from company profits, the company must have sufficient distributable reserves 

Tax Rates and Considerations 

In the UK, the tax rates for different types of income vary: 

Income Tax Rates for Salary and Bonuses – England, Wales and Northern Ireland 

Basic rate	20%
Higher rate	40%
Additional rate	45%

Income Tax Rates for Salary and Bonuses – Scotland 

Starter rate	19%
Basic rate	20%
Intermediate rate	21%
Higher rate	42%
Advanced rate	45%
Top rate	48%

Dividend Tax Rates – UK wide 

Basic rate	8.75%
Higher rate	33.75%
Additional rate	39,35%

Reimbursement of expenses 

Costs paid personally by the director on behalf of the business are reimbursable. Examples of expenses paid personally may include travel and subsistence, equipment and other services. 

Drawings 

Unlike a sole trader business, a limited company is a completely separate business entity to its owners and managers. Therefore, unlike in a sole trader or partnership business, you cannot take drawings. Extracting payment from a limited company that is not salary, bonus or dividend will be recorded as a loan to the director. A directors loan must be managed accordingly. 

For more information on directors’ loans, including interest charges and repayment dates, read our article on Directors’ Loan Accounts Explained. 

How to choose directors’ pay: Salary vs dividend 

Several factors influence the decision of how a director is paid. Generally, most directors of owner-managed companies will be paid a mixture of salary and bonus and dividends in the most tax-efficient way. There are things to consider when calculating the best method and balance of payments. 

• Tax efficiency: Asking your accountant to prepare calculations will allow you to minimise your tax liability. Your calculations may include a few different options to consider and you may choose the most tax-efficient method of payment. 
• Business finances: It is essential that you ensure the company has sufficient profits to pay dividends and can afford salary and bonus payments. If your salary and bonus has depleted company profits, there may be no distributable reserves to make a dividend payment to shareholders. 
• Personal circumstances: Another consideration is the individual circumstances of the directors. For example, their financial goals, commitments, and other income sources. 

Taxable benefits in kind 

In addition to salary, bonus, and dividend payments, directors may also receive taxable benefits. These benefits can include company cars, fuel, private medical insurance and other perks. 

Benefits that are not tax-free (such as workplace parking, a mobile phone and drinks at work) are subject to income tax and NICs. 

Directors’ Pension 

As a director of a limited company, enrolling in a company pension scheme allows you to plan for your future. Pension contributions paid by the company are also an allowable expense for a limited company. 

Saving into a pension can be a great way of extracting profits from the business that you are happy to put into a pension that you access on retirement. 

How TaxAssist Accountants can help 

Our experts can help you when it comes to arranging your pay in the best way for you, taking into account your personal circumstances and tax efficiency. Give our friendly team a call today on 01484 424961 or use our online contact form. 

Last updated: 6th August 2024