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:
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.
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.
There are certain circumstances when it may not be advisable to set a directors' fee at £157 per week:
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.
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