Are You Paying Yourself in the Right Way? How to Pay Yourself as a Company Director
When you run your own limited company, there’s a question that can easily become something you deal with on autopilot:
How are you paying yourself?
Perhaps you take a salary and dividends because that’s what you’ve always done. Maybe you withdraw money when you need it. Or perhaps the business has grown considerably since you first decided how much to pay yourself, but your approach hasn’t really changed.
There isn’t one answer that works for every business owner.
Your company’s profitability, your personal income, pension plans, other sources of income and what you actually need to take from the business can all influence the right approach.
That’s why how you pay yourself is something worth reviewing regularly, rather than setting once and forgetting about it.
Salary, dividends… or both?
For many directors of limited companies, remuneration will involve a combination of salary and dividends.
But they are not interchangeable.
A salary is a business expense and is generally subject to PAYE and National Insurance rules.
Dividends, on the other hand, are paid from profits available for distribution after Corporation Tax and have their own tax treatment. They can only be paid when the company has sufficient distributable profits.
So while combining salary and dividends can be appropriate for many directors, the right balance will depend on your individual circumstances.
And importantly, tax rules and allowances change.
The approach you agreed with your accountant several years ago shouldn’t necessarily be assumed to still be the best one today.
How much do you actually need to take out?
Before deciding how to take money from your company, there’s another question worth asking:
How much do you actually need?
There’s a difference between what the business can afford to pay you and what you personally need to withdraw.
Taking more money out simply because it’s available can leave less cash within the business for:
- tax liabilities
- investment
- recruitment
- equipment
- unexpected costs
- future growth
- building a financial buffer
Likewise, leaving everything in the business without considering your own financial goals may not make sense either.
The aim should be to find an appropriate balance between your personal requirements and the needs of the business.
Don’t forget about dividends
Dividends can be an important part of how company directors pay themselves, but there are rules around when and how they can be paid.
A dividend isn’t simply a transfer from the company bank account whenever you want some additional money.
The company needs to have sufficient distributable profits, and the appropriate records and paperwork should be maintained.
This is another reason why keeping your accounts up to date throughout the year is useful.
If you understand your current profit position, you can make much more informed decisions about what the company can afford to distribute.
What about pension contributions?
Paying yourself doesn’t necessarily mean putting money directly into your bank account.
For some business owners, company pension contributions can form part of the wider remuneration and retirement planning conversation.
Depending on your circumstances, making pension contributions through the company may have tax advantages while also helping you build towards your longer-term financial goals.
But pensions shouldn’t be looked at purely as a tax-saving exercise.
You need to consider when you’ll need access to the money, your retirement plans and your wider financial position.
This is where looking at your business and personal finances together becomes particularly useful.
Be careful with the director’s loan account
Sometimes directors take money from their company that isn’t salary, a dividend or repayment of money they’ve previously lent the business.
That can create a director’s loan.
Director’s loan accounts aren’t necessarily a problem, but they do need to be properly recorded and managed.
If you owe money to your company, there can be tax consequences depending on the amount involved, how long it remains outstanding and your individual circumstances.
If you find yourself regularly taking money from the business without being completely clear about how it’s being treated, that’s something to discuss with your accountant.
Your business may have changed
This is perhaps the biggest reason to review how you’re paying yourself.
Think about your business three or five years ago.
Now think about it today.
Has turnover increased?
Are profits higher?
Have you recruited?
Do you have more cash reserves?
Has your personal situation changed?
Are you thinking about retirement?
Do you have different investment plans?
Are you considering selling the business eventually?
If the answer to several of those questions is yes, why would you automatically assume the way you pay yourself should remain exactly the same?
Your remuneration strategy should evolve as your business and personal circumstances do.
Don’t look at tax in isolation
It’s tempting to approach this question by asking:
“What’s the most tax-efficient way to pay myself?”
Tax efficiency is obviously important.
But it shouldn’t necessarily be the only consideration.
You also need to think about:
Cashflow. What can the company comfortably afford?
Personal needs. How much income do you require?
Business plans. Is the company preparing to invest or grow?
Retirement. Are you making appropriate provision for the future?
Other income. Do you have income from elsewhere that affects your overall tax position?
Long-term plans. Are you building a business you eventually want to sell or pass on?
The most tax-efficient answer on paper isn’t automatically the best answer for your wider circumstances.
And don’t wait until year end
This is another conversation that’s much more useful when it happens during the year.
If you wait until your annual accounts are being prepared, you’re largely looking backwards at decisions that have already been made.
Regular management information allows you and your accountant to see how the company is performing and make informed decisions about remuneration as the year progresses.
It also means you can plan for upcoming personal and business tax liabilities rather than being surprised by them.
Five questions to ask yourself
If you’re a company director, ask yourself:
- When did I last properly review how I pay myself?
- Do I understand the tax implications of my salary and dividends?
- Do I know how much the business can comfortably afford for me to take out?
- Should pension contributions form part of my wider plan?
- Does my current approach still reflect where my business and personal finances are today?
If you can’t remember the last time you had that conversation, it might be worth having it again.
Paying yourself should be part of the plan
At Exchange Accountants, we don’t believe decisions about remuneration should be made in isolation.
How you pay yourself sits alongside the profitability of your business, its cashflow, your tax position and your personal plans for the future.
And as those things change, your approach may need to change too.
So rather than simply doing what you’ve always done, ask:
Am I still paying myself in the right way for the business and life I have today?
If you’d like to review how you’re taking money from your company and understand the options available to you, speak to the team at Exchange Accountants.
Let’s Grow Together.
