Company Directors pay personal tax?

[jeffers]

Hi,

I realise companies pay company tax, but the directors that have taken a wage from the company, do they then have to pay income tax on that aswell?

Thanks

[robbob]

Hi jeffers.

Company director's must pay tax as normal employees / individuals. One requirment is that normally company directors must complete a tax return.

A couple of points to remember.

If a company pays the director a salary then tax should be deducted as appropriate.

Most small company directors take the majority of their money from the company via dividends. These dividends can only be paid from profits the company has made post corporation tax.

There will be no additional tax to pay by the director on dividends taken as long as he/she is not a higher rate taxpayer.

Note dividends paid are grossed up by 10/9 for establishing taxable income purposes.

[jeffers]

Thanks for that robbob...so, just to clarify, as an example.

Company earns say £100,000 - pays it's corporation tax 20% so post tax profits are 80k. Director then takes salary of 40k, he must pay tax on that at the normal personal tax rates - is that correct?

If so, it seems rather scandalous to me, that a director has to pay so much tax, and effectively tax twice!

Thanks

[robbob]

Hi jeffers.

This is not quite right.
Any salary paid is an allowable expense of the company whereas dividends are not.

Ie in your example

100k less salary less ers nic = amount chargeable to corp tax.

If money was all paid out in dividends the corp tax would be on full 100k

[BonyT99]

No. Directors salary is deducted before corporation tax. eg In your example, Director pays income tax on 40k, company pays CT @ 20% on 60k.

Note that your above example would normally lead to the advice of a dividend route rather than salary, depending on other factors.

[jeffers]

Thanks guys, that makes a bit more sense now...so if the 40k was paid as dividends, how is that taxed from the director personally?

[BonyT99]

As dividend income. How this is taxed depends on the directors persoanl circumstances (ie other income etc). Dividends have no further tax implications for basic rate taxpayers. There will be additional tax to pay if the direcotr's total income falls into the higher rate tax bracket.

[robbob]

Ok 40k paid as divis (all to director)

This is treated as 40,000 * 10/9 gross on the directors tax return.

40,000 * 10/9 = 44,444

The director needs to pay 22.5% tax on any dividends that take the directors income over the 40% threshold.

As a simplification once you are above the 40% threhold the individual will have to pay 25% tax on any net dividends(ie before 10/9 calculation done) paid above this level.

One other thing to remember with high dividend payments v salary is that any personal tax bill must be met by the director himself.

[jeffers]

Ok, so all that's owed on dividends is 22.5% of 10/9 on all divs OVER 34.6k (or whatever the 40% bracket is)...ie. nothing is due on dividends below this?

[BonyT99]

Correct. Normally a company will split the distribution (in the above example) into a salary that reaches the LEL to gain that year's stamp. (NI contributions for the year for state pension even though none actually paid) and the remainder in dividends.