For directors of UK businesses, deciding on a tax strategy and ensuring all legislation is always upheld is an integral part of your role.
There are two key forms of payment that a director may earn, and both have very different implications when it comes to tax.
The first is salary. This is a yearly wage paid to the director in exchange for them upholding their role and performing their duties.
The second is dividends. These are based on company profits and are payments given to shareholders.
A director may receive both, or just one, and knowing how to correctly fulfill them in their tax returns is vital.
Here at Blue Rocket Accounting, we know how complex the UK tax system can be, and we’ve created this guide to provide some clarity and advice on this matter.
Let’s take a look.
Director’s Salary Tax Returns
Nearly every director will receive a salary. This will be an annual wage often paid every month, and certain taxes have to be paid on it.
Income Tax
When it comes to salary, this is always subject to income tax. This amount is calculated based on your salary and the relevant tax rates. Depending on how much you earn, the amount you pay back may increase.
This form of tax is normally collected via the PAYE system and is often done on a monthly basis to avoid one large lump sum at the end of the financial year.
National Insurance Contributions (NIC)
As a director of a business, both you and the company are required to pay NICs on your salary. The traditional NICs are Class 1s, and these are the primary category for employees.
As well as these, the company also contributes through employer’s NICs, so you must ensure you are always on the ball on both fronts.
Company Expenses
A director’s salary is considered a business expense. Therefore, a business can claim corporation tax relief on the amount paid.
This can be a big boost to a business’s finances and save a company a lot of money when it comes to paying its tax.
One thing to note here though is that the salary must be justifiable for the work undertaken, meaning you must be able to show the work that you’re paying for. This is to avoid people trying to work their way around the system and claim back more than they should.
If you can’t do this, you may go against tax regulations, and it may end up in a dispute.
Director’s Dividends Tax Returns
When it comes to dividends, things work very differently. This is a varying payment as it is based on profits. As it is not a steady amount, it can be harder to calculate tax payments, so help may be needed in this regard.
Some important things to consider here are:
Dividend Tax
When a director is paid dividends, you must pay dividend tax.
This is different to income tax and has different rates that are specific to this form of payment.
You can get away tax-free up to a certain amount (like income tax) but after a certain threshold, you must consider working out the rates and calculating your dividend tax returns.
Exemption from NICs
One payment you don’t have to worry about with dividends is national insurance contributions.
This is a key benefit of this type of payment.
If you’re looking to reduce your tax spend, then choosing to receive more in dividends compared to your salary can lead to potential savings since NICs can constitute a large portion of tax liability.
Distribution of Profits
Another key thing to consider, and another benefit of dividends, is that you are sharing your business profits. This means that you can be flexible and can be a big help in aiding tax-efficient profit distribution and financial planning.
As a director, you should be in a position where you get to decide when these profits are distributed, and how much, which can be a big help in working on tax returns and maximising savings.
Key Tax Considerations for Business Directors
Now you know some key areas to focus on in each of thesetopics, here are three key considerations when preparing and submitting yourtax returns:
· Finding the Right Balance is Key –When considering making your business as tax-efficient as possible, you should try and find the right balance between salary and dividends. This decision should align with your financial requirements, long-term financial planning,and tax efficiency objectives.
· Compliance and Record Keeping –The world of tax returns is a complex one, and you should always keep up to date with the latest legislation and rules of this industry. Another vital aspect of tax returns is keeping accurate and organised documents. This ensures you are always calculating the right amounts and have any documentation you may need always at hand.
· Professional Tax Planning – If you would like to always hit the perfect mix between your salary and dividends,then hiring a professional tax expert is a great option. This will be someone well-versed in UK tax law who can work with you to structure your income in the most streamlined and prosperous way.
Tax Advice from Blue Rocket Accounting
If you’ve read the last point and think working with a professional is the best choice for you, then you’re in the right place.
Here at Blue Rocket Accounting, our team of experts can provide tailored solutions to all of your tax needs.
Whether you would like help to structure your income, help to organise and store your documentation, or advice when it comes to submitting and paying your tax returns, then we can help.
Want to know more? Then get in touch with our team today.
