How Much to Pay Yourself as a Director to Minimise Tax
As a business owner, it is basic foundational knowledge to know how much you should pay yourself. Regardless whether you have a chartered accountant, regular accountant or bookkeeper handling your finances, you should know what the tax implications are of how you pay yourself. If you don’t you can’t ensure you are being paid in the most tax efficient manner.
When accounting clients come onboard with GrowFactor we always look at how the directors are paid to check they are paying the minimum tax possible. Too often we’ve spoken with new clients that are getting paid at all the wrong levels. A recent client was paying an extra £3000 a year in tax just because their accountant had given them poor advice to pay a large salary instead of paying a director salary with dividends.
This is super frustrating for us but it should also be super frustrating to you as a business owner. The money that is left on the table and wasted due to bad advice could have gone into growing your business. That money could have been taken out as dividends and could have funded your lifestyle. Business owners aren’t getting supported enough with the right advice on directors salary and dividends. There isn’t enough emphasis on tax minimisation.
If you’re overpaying or paying at the wrong levels, you’re going to be overpaying tax. This means you’re not going to have as much to take out, and over time that’s going to drive profitability and cash flow of the business down.
So what do we do about this?
The solution is check where you’re at now. Understand the changes made to Directors Salary and Dividends each tax year. Make sure you know the personal tax allowance and dividend allowance each year. For 2019/2020, your personal allowance is £12,500, whilst the dividend allowance remains at £2000.
Beyond the basic PAYE and dividend rules you need to take into consideration if you are filing a R&D claim or some other kind of tax claim. For example, if you are filing a research and development tax relief claim, dividends do not count towards credible costs. Therefore, if you’re a director of a marketing agency that spends lots of time on R&D allowable stuff, it can be better to pay a salary as a director. Even though you’d save tax by paying dividends, it may be more beneficial to pay 100% salary because of the R&D claim. This is something you need to consider and discuss with your accountant. Make sure you get a specific bespoke calculation to see which way will be better for you and what levels of salary.
If there’s no R&D claim, there’s no other tax considerations, you have a profitable business (on paper), and you have a profit reserve you should be taking dividends from the accumulated profits.
Every time you pay a dividend, the accumulated profits go down. If you have never made profits then you can’t take dividends.
For 2020, if you’ve got your own business, you’ve got equity in that business, and you are able to pay dividends because you’ve got profits, then you’ve got two options. Option 1 is to pay £719 pounds salary and then make a second transfer for a top up dividend amount.
Option 2 is paying yourself, for example £30,000 of profit from your company, as a full salary (not via dividends) then you’ll pay about £3000 more in tax than you would with option 1. If you earn £50 or £60k, which is what a lot of small business owners earn, you’ll pay £6k more in tax with option 2 (large salary instead of small salary with dividends). As you can imagine as you pay yourself more and more, the differential in tax gets bigger and bigger.
If you want a personal calculation, if you think you’re not at the right level, or you’re just not sure, send us a message or reach out to us.