Sole Company Director: How Do I Get Paid by My Own Company?
8 minute read
Imagine a life where you go to work every day and you are the one that makes all the moves and pulls all the strings. Sounds great, right?
That can be your life if you start a successful business. However, bear in mind that being a company director, the one behind the whole system, can be a bit challenging, as you are the one who takes the most responsibility.
However, there are no better rewards than those you get knowing that you have built a successful organization which makes you a rich and happy person.
So, are you ready for this challenge? If so, let’s take a look at one of the most common issues people do not understand about the head position of a company.
How do I pay myself as a director?
For this occasion, it is important to know that a limited company is a different legal entity from a sole proprietor. The profit you make when you go it alone is all yours and it can be seen as your income while this principle does not apply to limited companies.
As the CEO, you can withdraw money from the company account, but this needs to be done through an appropriate method.
Three main methods include:
- Pay as you earn
- Director’s loan
When and how much you get paid depends on the business itself, but there can be tax advantages of using one method more than the other.
Each of these three methods shall be examined in detail below. In addition, after covering these three, we will take a look at director’s fees as one of the ways directors use to get paid.
Pay as you earn (PAYE)
PAYE can be described as the most basic way to get paid as a limited company director. This concept is quite simple, since even the director is still an employee. It depends on the region, but this scheme is usually operated by an adhering government body that is responsible for tax collection.
This is the way you would normally receive your pay on a weekly or monthly basis if you were in any other form of employment. You would run a payroll, submit your figures to the responsible government body, and pay yourself the net amount.
However, it is first necessary to register for this scheme. Once you have been registered successfully, you also need to start submitting reports before each payday regarding each employee, including yourself.
Also know that directors are treated similarly to other employees on the same scheme but with different methods regarding taxes. In most regions there are two methods to choose from:
- Standard method
- Alternative method
Finally, using this option means that a director is going to be qualified for the state pension and benefits entitlements. On top of that, this does not incur a personal tax liability.
This method is very different from PAYE. To make use of it, an individual has to be a shareholder, which shouldn’t be a problem, since most directors are indeed shareholders.
A dividend is paid to shareholders and it can only be paid when the directors agree to do so and when the company has made a profit. Usually, it’s paid once or twice per tax year, but it is up to the directors to decide if and when to issue a dividend.
To issue a dividend and get the money through this method, there are a few points to consider:
- It is necessary to ensure that the company has enough profit available to allow the dividend to be issued and paid.
- A meeting has to be arranged and each decision regarding the issuance of dividends has to be examined.
- Once that is completed, a tax voucher has to be generated for each shareholder.
- Finally, it is time to issue the dividend payment and tax vouchers. This usually involves filing the board minutes and accounts at the registered office.
Bear in mind that directors of profitable companies that pay taxes and have a significant cash buffer almost always use this method. And the reason for this is rather easy to understand.
Income can be taken out of the limited company in the form of dividends, which are paid out of the company’s profits after corporation tax has been deducted. This is an amazingly tax-efficient method of taking money from the company, as there is no personal tax liability on net dividends up to a certain amount.
Even payments above this level will attract a more favorable tax rate than if the money were taken as a salary.
Finally, be careful, since dividends come with various tax advantages and disadvantages. Therefore, it is always wise to consult the company accountant before you actually make a decision.
A loan of this kind is an efficient way to get paid by your own limited company, but it can lead to a negative outcome if the whole procedure is not managed properly. Keep in mind that this method is neither a salary nor a dividend, but you are still paid the money.
First of all, all transactions of this kind need to be recorded in a director’s loan account. This is designed to keep a running balance of the transactions between a director and the company itself.
If the director has paid more into the company than he has taken out, account balances can be in credit. On the other hand, the balances can be overdrawn if the director has withdrawn more money than he or she has paid in.
Insolvent companies always face one issue, which is overdrawn director’s loan accounts. However, in case of a viable solvent business, they can be repaid in full or in the correct circumstances even written off by the company.
Finally, all transactions in the loan account have to be accounted for in the company’s balance sheet and may also have to be included in the company tax return and the director’s self-assessment return.
Generally, directors with overdrawn loan accounts do not have to pay any income tax as long as the sum is repaid within nine months of the company’s account reference date.
Bonus method: A note about director’s fees
Since director’s fees are a common way directors use to get paid for their services, it is worth noting a few important things.
Director’s fees are remuneration to the director for their services. However, to be eligible for these fees, you cannot be an employee of your company and you must meet specific procedural requirements.
These fees cover travel costs, attendance of meetings, and expenses associated with directorship. Bear in mind that your company’s shareholders can decide whether they want to approve such payments under the Corporations Act.
Directors’ fees are subject to superannuation at the normal rate of 9.5% based on ordinary time earnings.
Additionally, there is another important point to cover, and that is the procedural requirements for the director’s fees.
For instance, company directors cannot get paid if they are an acting trustee for a trust. This is only possible if a resolution is passed at a general meeting. Still, some regions see this method a bit differently.
For instance, in Hong Kong, a director’s fee is always subjected to salaries tax. Even though taxation is based on the territorial principle in Hong Kong, in this case it does not matter if the director is located in Hong Kong or not. Also, it does not matter if the person is a resident or not.
Hence, the company has to declare the director’s fees at the same time as payments are made to employees in the Employer’s Tax Return to the IRD every April.
As you can see, there are a few effective options when it comes to getting paid by your own company, but the final choice ultimately depends on your personal preferences and your situation.
It is worth underlying again that different income tax and legal obligations apply for each method. Hence, you should really put in the effort to get a good understanding of these methods.
It is important to know that there is no way to avoid paying taxes. However, there are more and less tax-efficient methods, so you will need to make that decision alone based on your situation.
If you are uncertain about any of the aspects of this issue, the best thing you could is to contact professionals.
Feel free to message Sleek. We can always offer an expert in accounting services that can provide you with a personalized piece of advice. We will be glad to help you make the best decision possible that works well both for your company and yourself.