What tax do I pay as a Company Director?

If you are a director of a limited company it is important to know how much tax and national insurance you will pay.

Many limited company directors are paid a basic salary under PAYE and company dividends at the same time.

This means two types of tax will be applicable along with a potential deduction for national insurance as well.

A different rate is used to calculate dividend tax, tax under PAYE (income tax) and national insurance contributions.

We cover the types of tax and national insurance and their rates that you may pay as a company director and shareholder.

What is Dividend Tax for Company Directors?

It is common for company directors to also be a shareholder of the company which means they are eligible to receive a dividend.

Dividends can only be paid on available profits from a current or previous tax year and only paid to a company shareholder.

The dividends must be distributed according to the percentage of shares owned by each shareholder.

A dividend is not classed as a business cost so cannot be used to reduce a corporation tax bill.

The company paying a dividend does not pay tax on the dividend income instead the director becomes liable to pay income tax on the dividend as an individual.

Company profits are calculated after the deduction of corporation tax at a rate of 19% (for profits up to £50,000) or 25% (for profits over £250,000).

A marginal relief is given to companies with a profit of between £50,000 and £250,000 which results in a gradual increase from 19% up to 25%.

What are the Dividend Tax Rates for Company Directors?

Dividend tax is payable on all dividend income above the value of your combined tax free personal allowance and dividend allowance which is set at £500 per tax year.

The dividend tax charge depends on the highest rate of tax you pay on your income which can be at basic rate, higher rate or additional rate.

The dividend tax rates are:

• Basic rate tax: £12,571 to £50,270 @ 20% tax rate.
• Higher rate tax: £50,271 to £125,140 @ 40% tax rate.
• Additional rate tax: Over £125,140 @ 45% tax rate.

What is PAYE tax for Company Directors?

A company director for tax purposes is classed as an employee of the company which means income tax will be payable on some PAYE income.

Like all other employees under PAYE you will be given a tax free personal allowance which means you can earn income up to the personal allowance without paying income tax.

The personal allowance is currently £12,570 which means you can earn up to that amount before having to pay income tax.

What National Insurance does a Company Director pay?

There are four national insurance contribution types to consider as a limited company director.

Not all will be necessary and which are relevant to you as a company director and to your company will depend on the company structure.

Class 1 employee NIC’s

A limited company director is classed as an employee which means class 1 national insurance contributions will be operated through PAYE on the salary received.

Class 1 national insurance will be payable for both the director and the company.

The cost of employees class 1 NIC’s are allowable as a business expense and can be used to reduce corporation tax liability.

Class 1 employees NIC’s

For the company director the class 1 NIC rate is 8% from the primary threshold up to the upper earnings limit. After the upper earnings limit it is reduced to 2%.

Class 2 employees NIC’s

A class 2 NIC contribution is payable on earnings over the lower profits limit at a rate of £3.45 per week. Class 2 NIC’s can be paid voluntarily in cases where class 1 NIC’s are not being paid.

Class 2 NIC’s are important because they secure your entitlement to state benefits and pension.

Class 3 employees NIC’s

Class 3 NIC’s should be considered by some company directors if there is going to be or has been gaps in your national insurance record. Class 3 NIC’s are voluntary payments to ensure you qualify for some state benefits and full state pension.

Class 4 employees NIC’s

Class 4 NIC’s are to be paid at a rate of 6% on income that isn’t taxed above the lower profits limit. Any income above the upper profits limit is chargeable at 2%.