Salary and Dividends
As the director of a limited company you can withdraw a salary and dividends from the company bank account, provided that a payroll has been sent in place for the salary and that there are enough funds in the company for dividends. However much is declared in dividends, a payment must be made to each shareholder too. Both are transferred to the directors and shareholders by bank transfers, but for tax purposes each is treated differently.
Salaries are entered on to the director’s payslip each month, and PAYE tax is calculated on their earnings. The director receives the salary less the taxes to be paid to HMRC. If the director withdraws more than their monthly payslip total, then the over payment amount goes against the Director’s Loan account and the director will have to pay this money back in some way. The director will require the end of year P60 showing the total salary and PAYE taxes earned for their self-assessment tax return.
If a director has an asset the company owns for personal use, such as a car, then a P11D will be issued after the tax year end. Like income, Class 1 tax is calculated and paid on this as the benefit goes through the payroll. If the director has had the same asset for two or more years then HMRC’s tax codes will be adjusted to claim tax to cover future P11Ds. If it is the first year and the director is on a basic tax code they are likely to find themselves with a tax bill when the self-assessment return is prepared.
Dividends are paid to all the shareholders of the company. If the director owes a director loan to the company the dividends declared will reduce this loan. Unlike salary, dividends are not taxed before being paid to the shareholders. These are instead taxed when the self-assessment tax return is prepared. For the 2018/19 and 2019/20 Tax Years, shareholders can take up to £2,000 total dividends tax-free on top of the personal allowance if any remains. If the director is a basic taxpayer, they will be taxed at 7.5% of dividends over £2,000 until they hit the higher tax band. The tax rate then jumps to 32.5%, and then to 38.1% if the individual reaches the additional tax rate of £150,000 taxable income.
Dividends are paid to all shareholders, not just directors. A director’s wife could own a portion of the shares and so she would be entitled to her own share of dividends. If the additional shareholder’s dividend income exceeds £2,000 they would be required to prepare a self-assessment tax return. Dividends are paid based on how many shares a shareholder owns. A total of 100 shares may be issued with the director holding 70, so however much the director is paid, the other shareholders must be paid an equal amount up to 30%. For example, a £2,000 dividend paid to the director who owns 70% of the shares of a company would mean that a dividend of £858 between the remaining shareholders; the pay-out total would be £2,858, of which 70% is the £2,000 figure.
salary, dividends, personal tax, director earnings, shareholders