Tax Tips for Limited Company Directors

Manchester Chartered Accountants considers the question asked by a number of our clients who have considered the question – should I run my trading business as a Limited Company, or should I trade as a Sole Trader.

  • What are the benefits of being a limited company and trading as one?
  • What additional tax advantages would I be able to utilise as a Limited Company Director?
  • Are there commercial advantages to trade as a Limited Company?
  • What forms of compensation for being a Director offer me rather than a Sole Trader?
  • How can I extract the maximum profit extraction most tax efficiently from my company?

Being a Limited company director is a major responsibility and as such you should be financially rewarded as such, the answer is to ensure you consider and utilise the tax breaks of being a limited company director. As accountants in Manchester we consider all the above in this article and are free to answer any questions or queries you may have. Simply call us. Reviewing your remuneration package on a regular basis should be a major priority on your “to do” list as a director, we will also consider homeworking allowances such a subsidised childcare and medical cover and taking tax breaks through expense payments.

While ultimately subject to veto by the shareholders, it is the board of directors that determines the amount of director’s compensation, usually referred to as remuneration, for their duties and responsibilities. Typically, this will start with a basic salary and a right to pay linked to the company’s performance. Where you a shareholder you can expect to receive dividends to increase your income when your company makes a profit.

In addition to salary your company might pay certain expenses either directly or by reimbursement and provide non-cash benefits. Here are the basic components of a typical director’s remuneration package.

  • A basic salary
  • Short term incentives or bonuses
  • Benefits in Kind
  • Long-term incentive plans (Share Schemes ).
  • Termination Protection or “Golden Parachute” payments.

Other components of a director’s compensation package may include such perks as a company car, health insurance, using company assets, interest free loans, generous retirement plans etc. Indeed , once you have negotiated the big salary you are now in a position to give some of it up or “sacrificing” it in exchange for more tax efficient forms of remuneration as a limited company director.

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Tax Tips suggested by: Manchester Chartered Accountants

Benefits in Kind: Generally, when a company pays your expenses and provides non-cash benefits you must pay tax as if these items were part of your salary. However, unlike salary, directors do not have to pay National Insurance on benefits in kind.

Directors may also be recompensed with shares in the company which are almost always subject to restrictions (a long -time incentive ) which tie them to the company. For example, they might set a period of time before the recipient has the right to receive, sell or transfer the shares. Usually share incentive agreements are medium or long term: Incentives which run over a period must be in excess of one year and usually between three and five years.

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Tax Tips Suggested by Manchester Chartered Accountants

Share Options: Cash compensation example being a salary is taxable on receipt. Granting share options instead is a longer term arrangement which often comes with advantageous tax treatment such as the chance to sell shares and be taxed at capital gains tax ( CGT ) rates which are lower than income tax. In 2019/20 the highest income tax rate is 45% whereas it is 20% for capital gains tax unless it rates to residential property in which case it is 28%.

Directors Fees

There is often confusion between directors’ fees and directors’ remuneration. There is an important difference between the two.

Directors may be paid fees in return for simply taking on the responsibilities involved without actually performing work in the company’s trade or business. Fees, like other forms of remuneration, are ultimately paid at the discretion of the shareholders. In small privately owned companies the directors and shareholders are often the same people and so there will be no dispute between the two over the amount of fees payable.

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Tax tips – distribution of profits.

The deductibility of directors’ remuneration for company tax purposes is something that often raises concerns. However, importantly, in practice justification for the salaries or wages paid to a company director/shareholder of a small to medium-sized private company is rarely challenged by HMRC. This is important as in the event of a company insolvency if the company pays the director or directors/ shareholders a fair salary and the company is subject to insolvency proceedings it is unlikely that the insolvency office will challenge the director against his responsibilities and duties. On the contrary if the director or directors instead pay themselves dividends which exceed the profits of the company this can and will be judged as an action which may contravene Companies Act 2006 and the director may see severe action taken against him personally as dividends are only allowed to be distributed once other creditors have been paid in full. The payments of dividends are a “distribution of profits” only when other creditors have been settled”.

Also, where your company chooses to provide you with a tangible asset for personal benefit, for example use of a company yacht, the tax relief your company receives in both these situations might be spread over several years. This factor must be taken into account when considering the overall tax effectiveness of a remuneration package.

KEY POINTS: COMPANY DIRECTOR:

  1. As a director of a company you are taking on an onerous responsibility and should be compensated for that.
  2. Until you own shares in the company you cannot be compensated for this risk by way of taking dividends as a form of income.
  3. Before being a shareholder you need to concentrate on the tax-breaks related to your remuneration package, not just salary. Each non-salary component has particular tax breaks associated with it.
  4. If you reassess your remuneration or salary package as a director of your company to include a particular expense you would like the company to incur as a benefit in kind for yourself, the tax deductibility for your company needs to be considered.
  5. Directors fees are taxed in the same way as a salary would be. So this is not a tax efficient alternative to a salary.

If you wish to seek further free tax advice on how to take the most out of your company tax efficiently please feel free to contact the leading firm of Manchester accountants.

Article Written by Manchester Chartered Accountants : 3rd December 2019.