Many Ltd Company Directors find themselves answering this question, shall I register as a salaried employee or not? The answer depends on the levels of company turnover and profit. In other words, could your turnover cover your payroll expense? If the answer is yes, the next question would be, if you did not have a payroll expense, could you have ended up with a substantial profit in the company? If the answer is yes then being on payroll could be beneficial, if the answer is no then you could run with a noticeable loss in the company’s balance sheet. It is a matter of opinion and it is always a good decision to discuss your options with your business or accountant advisor.
There are advantages on placing a Director on the payroll:
- The Director will get a fixed remuneration and therefore will be able to pay National Insurance contributions as well as income tax from their earnings. The National Insurance contribution you make will cover you up for other state benefits and your future state pension eligibility. During the Covid 19 pandemic, Directors who were on the PAYE system found themselves in a better position than those who were not in order to qualify for the Furlough Scheme and therefore the Coronavirus Job Retention Scheme. There are other elements to take into consideration in the day to day life, and that is making your life easier when getting a mortgage, a personal loan and insurance for crucial illness types.
- The Director will get remuneration no matter what! This means when the company does not make a profit the Director still gets their salary payments.
- The Director’s salary will become an expense to the company and this is allowable. A very important element is that the Director’s remuneration will reduce the Corporation Tax bill.
- The disadvantage could be seen as that you pay higher rate of income tax and you have to pay National Insurance Contributions. For many this could be a loss rather than a long term investment, until they found themselves in a better position when receiving Furlough payments. You contribute to the State and the State will help you in another way when you most need it and this is an opinion.
There are advantages for the Director to receive only dividends:
- The Director can pay themselves either interim or yearend dividends. Interim dividends are the ones paid along the year like monthly, quarterly, etc. The yearend dividends are once the company has completed the yearend accounts. In any case, dividends can only be paid if the company has made a profit (revenue against expenses is equal to profit). Once the dividends are paid to the Director the tax rate is lower. The other element to take into consideration is that you will not be taxed on the first £2,000 of your dividends (there is an illustrative explanation on https://www.gov.uk/tax-on-dividends). The tax rates for dividends are more appealing in comparison with Income Tax. The basic rate for year 2021-22 stands on 7.5% rate and that is over the allowance previously mentioned. You are not bound to pay National Insurance contributions on your dividends.
- You avoid the hustle of paying an accountant to work on your payslip and all the paper work.
- You don’t make a profit, you don’t pay yourself dividends.
So, it is your decision. To Payroll or Not to Payroll! That Could Be the Question! Or maybe the question is rather to become Self-Employed? That is another question for next time.