Directors' fees are payments from your company to you for your services as a director. They are liable to PAYE and NIC deductions, but in terms of your company expenditure they need to be accounted for separately. It is your choice whether or not to take a director’s fee, as it is equally possible to provide your services free of charge. If you are the sole director this is your decision. If there is more than one director the decision should be a joint one.
There are two key issues to consider:
- The National Insurance lower earnings limit
In order to qualify for the full state pension and other social security benefits you need to have earned more than the ‘lower earnings limit’ for a period. This period varies benefit by benefit and, in the case of the state pension, can be a very long-term calculation. The lower earnings limit is £113 per week for the 2017/18 tax-year (which commences on 6 April 2017). If you fix a directors’ fee below this limit and do not have any other income subject to National Insurance, you may affect your eligibility for future benefits.
- The tax implications
Everyone can earn a certain amount each year without paying any Income Tax. This is called your Personal Allowance. There is also an amount you can earn before you pay any National Insurance contributions. It makes sense to use these allowances and thresholds each year. A directors’ fee is often a good way to do this as the fee is tax deductible for corporation tax in the company and, up to the personal allowance, will not attract any Personal Tax or National Insurance.
How Directors' Fees are taxed
Directors' fees are tax-deductible expenses for your company. As a result, providing it is profitable, the company saves Corporation Tax on directors' fees it pays. They are however, taxed under the Pay As You Earn (PAYE) system. You will be liable to National Insurance on the directors' fees you receive above the thresholds and for Personal Tax on the directors' fees you receive above the personal allowance for the year.
National Insurance is payable on earnings above both the ‘primary (employees) threshold’ of £157 per week and the ‘secondary (employers) threshold’ of £157 per week for 2017/18. From 6th April 2017, these have both been aligned. This is at a rate of 12% for Employees National Insurance on amounts above £157 a week up to £866 a week, and then 2% thereafter. Employers National Insurance is payable at 13.8% on all amounts above £157 a week. The combined rate of National Insurance is therefore 25.8% for directors' fees exceeding £157.
From 2016/17, HMRC removed the Employment Allowance for sole directors of limited companies, however, the allowance of £3,000 still remains for companies who employ additional directors and/or employees.
For sole directors, we are recommending an annual salary of £8,164, being £157 weekly, or £680 per month, for 2017/18 – in order to utilise the taxable personal allowance to increase the tax savings. There will be no Employers or Employees National Insurance due on these amounts.
For directors who have more than one employee, we would recommend a director’s fee of £11,500 to take advantage of the Employment Allowance scheme.
If a directors’ fee is less than the ‘Lower Earnings Limit’ of £113 a week you may not retain your entitlement to full basic State Pension, Jobseekers Allowance and other Social Security Benefits.
The effect of a Directors' Fee on your pension
A directors' fee is considered to be ‘earned income’ for pension purposes. Any personal pension contributions that you make are limited to 100% of the directors' fees that you receive in any one tax-year (plus any other employment income you may receive in that year). If you want to pay more than this into a pension you would either need to increase your directors' fees, or consider a mixture of personal and company contributions.
Setting a Directors' Fee
Theoretically you can pay yourself any fee you wish providing the company has sufficient funds to pay both you and the associated PAYE and NI.
There are certain circumstances when it may not be advisable to set a directors' fee at £157 per week:
- You are working on an assignment that is captured by IR35. In this scenario you will be in receipt of income that has been subject to Income Tax and National Insurance.
- If you are in receipt of a pension/state pension that makes use of your personal allowance and you have been advised that you have a full NI contribution record. You can pay yourself by way of dividends only.
- If you will be in receipt of other employment income during the year that makes use of your personal allowance and NI thresholds. Again, you can pay yourself by way of dividends only.
If you are in between assignments and are claiming Jobseekers Allowance you should reduce your director’s fee to NIL for that period. The receipt of jobseekers allowance contributes to your National Insurance record and taking a directors' fee may affect your claim for Jobseekers Allowance and your Personal Tax liability.