Most people are employees and they get their income when they are paid by their employers. However, for those who run their own businesses, how do they get paid? A limited company owner should know how they would get paid and there are many ways to do that which are also tax efficient. A company director pay is not that difficult to understand. Here is a quick guide that should help you get more information on how the different ways that a company director can get paid.
Pay As You Earn (PAYE)
Pay As You Earn, also known as PAYE, is a good option to have. A company director is paid a wage monthly from the payroll. This means that all company directors would be getting a regular amount as their income and it would be included in the payroll, just like the other employees of the business. It would be a regular amount and it would cover the average expenses of a company director monthly. The disadvantage to this is that the company directors would also be paying income tax as well as National Insurance Contributions. The biggest amount would be 45% and that would depend on the amount of the salary of the company director. It is not seen as the most tax efficient way to get paid.
Dividends
Shareholders of a company can also be paid via dividends and this would be given when the business gets profit. This is considered to be a better way to get paid as compared to PAYE since tax is already paid through the corporation tax which currently stands at 20%. There is currently a dividend allowance which is at £2,000 and this option may not be a popular option among company directors. Those who earn more than the allowance can be taxed to as high as 38.1% and this is in addition to the 20% on the profits. In a nutshell, dividends are paid when a person receives more than £2,000 with these rates: 7.5% if it is right in the basic rate band; 32.5% if it is right in the higher rate band; and 38.1% if it is right in the additional rate band.
Pensions
One of the better ways to earn from the business would be to have a pension plan as it is deemed to be more tax efficient as compared to the previous two options. It is also a good thing since it is an investment in a person’s own financial security which would be for long term. It would mean a lot less on taxes but it also does have its own disadvantage. Company directors can make contributions right from the business and into their own pension scheme. This would help them have money when they reach retirement age. It is also important to note that company directors can draw down to a rate of 25% from the total pension without any taxes once they are 55 years old.
Directors of a limited company can have varied ways to get paid from the business. It is up to them to choose which one is the most tax efficient for them and which would work best for them.
published under Business Address Guides
