Director- Do i need to pay myself a wage?

[Smalltime]

Hi guys,
I have had a quick scan and couldn;t see anything on the forums, and since it seems things are changing often, it is probably not a bad idea to get a fresh answer anyway.
I have recently formed a limited company (not VAT regd). Have had a chat with an accountant friend, but want to make sure I have all my ducks in a row. The company is basically just for pimping myself out as a contractor, but I am sole director, shareholder etc.
SO...
Does the company need to pay me a wage? (and get into all that paye stuff) or, can i simply pay myself dividends from the profit? this is what the accountant chum reckons(and obviously pay personal tax and company tax as per usual).

Any help would be greatly appreciated, as would any link to helpful sites and even the relevant legislation!

Thanks guys

 

[peters10]

not quite 100% sure, but I think it all depends on how you have classed yourself.

That is, if there is a written contract of employment between yourself and the entity you created, you are classed as an employee and would thereby need to pay yourself a wage and also pay tax and NIC if your wage went beyond the respective thresholds.

If on the other hand there is no written contract, you are viewed as an 'office holder' and there is no requirement to pay yourself a wage and engage in PAYE stuff.

 

[peters10]

just had a quick search as this is something I also needed to look into, it backs up what I had mentioned previously and should definitely help clarify things for you, also has a bit about the dividend situation...

towards the end of the page there is a section called:
FAQ on directors' remuneration

hope this helps!

just been informed that I can't submit url as I do not have 15 yet, will try to PM you the link instead...

 

[David Griffiths]

You do not have to pay yourself a wage as a director, and directors are exempt from minimum wage legislation unless there is a written contract.

If you have employment elsewhere then there is no need to pay a salary, but if the company is your sole source of income then it is generally accepted that the best option is to take a salary of £5,720 and the rest as dividends

 

[elaine@cheapaccounting]

see here on salary v dividends ..

http://www.franklyaccounts.co.uk/fivesalary.php

and a free guide to running a limited company ....

http://www.cheapaccounting.co.uk/mailsltdcoguide.pdf

 

[MyAccountantOnline]

I agree salary and dividends - why not take advantage of all potential tax savings.

 

[KM-Tiger]

... why not take advantage of all potential tax savings.

Indeed. What many people don't twig (I nearly didn't when I started up) is that where there is no other income it's still better to pay the salary even if that means the company making a loss. If there is no cash to pay it, it can be posted to the DLA.

We've had people posting here that have not paid salary because they felt the company could not afford it, and in missing the May 19th deadline have effectively thrown away a year's tax free allowance. In cash terms probably enough to have paid their accountant's fee ...

 

[BobBuilder]

Indeed. What many people don't twig (I nearly didn't when I started up) is that where there is no other income it's still better to pay the salary even if that means the company making a loss. If there is no cash to pay it, it can be posted to the DLA.

We've had people posting here that have not paid salary because they felt the company could not afford it, and in missing the May 19th deadline have effectively thrown away a year's tax free allowance. In cash terms probably enough to have paid their accountant's fee ...

Useful points, well made.

What is the May 19 dealine please?

 

[elaine@cheapaccounting]

Useful points, well made.

What is the May 19 dealine please?

deadline to file your employer end of year returns - needed if you are paying anyone including yourself or subbies.

 

[Smalltime]

Hi Guys,

Thanks for all your replies, seems as though the generally accepted idea is that I should pay myself a minimum wage and take the rest as dividends. Which I gather would mean having to register my company as an employer for me, and get on top of NI and PAYE etc...and quite frankly, I will not be making anywhere near enough money to be bothered with all the hassle.
SO...is there any way I can do the director no pay but dividends and thereby live off my investment in the company? It is currently my sole source of income, but is in no danger of making profits close to the VAT margin!

OR do i have to go through the hassle of registering and setting up a payroll etc (and a bunch more reading for me!)

Cheers all

 

[MyAccountantOnline]

Registering as an employer isnt difficult and if you use a good accountant they will generally do that for you and look after the payroll too - we certainly do for our limited company clients. Its madness to waste the tax saving

 

[David Griffiths]

OR do i have to go through the hassle of registering and setting up a payroll etc (and a bunch more reading for me!)

Paying a salary of £5,720 will save you £1,144 in tax.

Pay somebody a few pounds to do the payroll for you. It only needs to be done once a year and the reports filed.

Result = no hassle and cash in pocket.

 

[elaine@cheapaccounting]

.and quite frankly, I will not be making anywhere near enough money to be bothered with all the hassle.

so why set up a limited company then? Confused :|:|:|

 

[Smalltime]

Why set up, well good question really- unfortunately the job I am currently working required (from the bl**dy recruiter) you either as an umbrella or a ltd company. Unfortunately they have the power, so a ltd co i set up...
Thanks you guys for your replies, I am still in two minds at the mo however, as I will most likely be doing a couple more months work, and then traveling for a couple of months ...soo, does that change anyone's reply at all?

Cheers again!

 

[elaine@cheapaccounting]

No it does - salary and divs

Plus get an accountant

 

[Davidad]

You do not have to pay yourself a wage as a director, and directors are exempt from minimum wage legislation unless there is a written contract.

If you have employment elsewhere then there is no need to pay a salary, but if the company is your sole source of income then it is generally accepted that the best option is to take a salary of £5,720 and the rest as dividends

Is the figure £5720 the same for the 2011-12 tax year ?

 

[IndiCafe]

The standard practice for contractors is salary (equivalent to your personal allowance), and the rest in dividends, because its the most tax efficient, meaning you end up with more in your pocket. A good accountants such as Uptons will do your accounts, your personal tax return, tell you your quarterly VAT liability, and do all the PAYE stuff for you.

 

[elaine@cheapaccounting]

The standard practice for contractors is salary (equivalent to your personal allowance), and the rest in dividends, because its the most tax efficient, meaning you end up with more in your pocket. A good accountants such as Uptons will do your accounts, your personal tax return, tell you your quarterly VAT liability, and do all the PAYE stuff for you.

no not the personal allowance but the amount earning threshold - if at PA you will pay some NI

 

[IndiCafe]

Yes, all contractors I know do pay NI of about £8 per month. Thats what accountants who have a specialism in contractors recommend, rather than have gaps in your NI payments which would affect things like eligibility for state pension
http://www.uptonaccountants.com/contractors.htm
http://www.sjdaccountancy.com/

 

[elaine@cheapaccounting]

Yes, all contractors I know do pay NI of about £8 per month. Thats what accountants who have a specialism in contractors recommend, rather than have gaps in your NI payments which would affect things like eligibility for state pension
http://www.uptonaccountants.com/contractors.htm
http://www.sjdaccountancy.com/

Again ....

If you pay a salary at the Lower Earnings Limited then you get credits for NI towards state pension but do not pay any NI. So no gaps in the NI payments and a saving of £8 per month.

http://www.cheapaccounting.co.uk/blog/?p=683

If you need this verified please check the Direct Gov site here ...

National Insurance

You can earn up to £110 a week (2010-11) before you pay any National Insurance contributions. This is known as the 'primary threshold'.
However, as long as you earn more than £97 a week (2010-11) you can still build up your entitlement to a State Pension and certain other benefits. This is known as the 'lower earnings limit'.


http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/WorkingAndPayingTax/DG_10016783

 

[David Griffiths]

Yes, all contractors I know do pay NI of about £8 per month. Thats what accountants who have a specialism in contractors recommend, rather than have gaps in your NI payments which would affect things like eligibility for state pension
http://www.uptonaccountants.com/contractors.htm
http://www.sjdaccountancy.com/

Paying £5,720 salary per annum means that you do not pay NIC, but you do get full credit for your NI contributions for state pension, state second pension (or whatever it's called this week) and other NIC related benefits. It is not necessary to actually pay the NIC, and if people are doing that simply to get the NI credits they are misinformed. You don't have to be a specialist in contracting to know that.

Having said that, it makes very little difference to the overall tax position because the corporation tax relief on the extra salary cancels out the NI position within pennies

 

[elaine@cheapaccounting]

cheers David - I some times start to doubt myself and all of that training & experience I have but good to know that I am not losing the plot

 

[IndiCafe]

Guess I should start questioning my accountants!

 

[elaine@cheapaccounting]

Guess I should start questioning my accountants!

guess so