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:
1) 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 £112 per week for the 2015/16 tax-year (which commences on 6 April 2015). 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.
2) 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 £155 per week and the ‘secondary (employers) threshold’ of £156 per week for 2015/16. This is at a rate of 12% for Employees National Insurance on amounts above £155 a week up to £815 a week, and then 2% thereafter. Employers National Insurance is payable at 13.8% on all amounts above £156 a week. The combined rate of National Insurance is therefore 25.8% for directors' fees exceeding £155.
HMRC have introduced an Employment Allowance scheme, allowing businesses to reduce the Employers NIC liability to a maximum of £2,000.
We are recommending an annual salary of £10,600, being £204 weekly to utilise the taxable personal allowance and take advantage of the scheme to increase the tax savings. This will result in some employees national insurance becoming payable on the directors fee however the corporation tax saving on the directors fees outweigh the national insurance that will be payable to HMRC.
If a directors’ fee is less than the ‘Lower Earnings Limit’ of £112 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 £204 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 directors' 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.