Knowing the rates and levels for Income Tax and National Insurance, as well as the rules for dividend tax and how you can be paid through a limited company, is crucial if you are a company director. To get you started, we'll present a quick rundown of tax rates and allowances, but for the most up-to-date and accurate information, we recommend speaking with a professional accountant.
For the 2022/23 tax year (from 6th April 2022 to 5th April 2023), the tax rates and allowances described below apply.
What kind of taxes does a company's director have to pay?
In a limited liability company, the directors are often the shareholders as well. In reality, many new businesses start out as “one-man shows,” with only one individual serving as director, shareholder, and employee. The following tax rates and deductions may be applicable depending on the arrangement:
The Income Tax
Generally speaking, directors are treated as employees for tax reasons, meaning that their businesses must register as employers and implement PAYE systems. Your wages from the firm will be subject to Income Tax and Class 1 National Insurance payments (NIC) through PAYE.
For the 2022–2023 tax year, your Personal Allowance is £12,570, meaning that the first £12,570 of your income is exempt from income tax. After reaching that threshold, your earnings will be subject to taxation.
State Insurance Contribution for Workers
Wages over the main level (£9,880/year from 6 April to 5 July, then £12,570/year from 6 July) and below the maximum earnings limit (£50,270/year) are subject to a 12% Class 1 employee National Insurance tax. There is a 2% NIC surcharge for earnings above the maximum. Using PAYE, these payments will be withheld from your paycheck at the appropriate times.
insurance contributions made by employers
If your annual salary or the salaries of any of your coworkers surpasses the secondary level of £9,100, your employer will be responsible for paying 13.8% of that sum as Class 1 employers' National Insurance.
However, if your business has more than one worker, you may be able to deduct up to £5,000 in Employment Allowance from your National Insurance payments.
Tax on Dividends
Profits are distributed to shareholders after the payment of Corporation Tax at the rate of 19% is deducted. This means that the money is taxed by the company first, and only then is it given to the shareholders. Beginning on April 6, 2016, there was a shift in how dividends are taxed. Historically, dividend income was exempt from personal income tax for those filing at the standard rate.
In light of the new regulations, the formerly tax-efficient strategy of accepting a little salary and a large dividend payout via a limited company is now less attractive, despite its obvious advantages. There is now a tax-free dividend allowance of £2,000 per year for 2022/23, replacing the previously-existing notional 10% dividend tax credit (which few people could actually comprehend).
Any dividend income you earn from your business that is over £2,000 will be subject to tax at the following rates:
Earnings between £12,500 and £50,000 are subject to 8.75% tax.
If your yearly salary is between £50,271 and £150,000, you'll be subject to a tax rate of 33.75 percent.
Earnings over £150,000 are subject to the 39.35% top tax rate.
The dividends you get are still paid out of post-tax earnings, therefore your firm will continue to pay Corporation Tax at the rate of 19% on these profits before handing any of them on to you. The new rules are intended to prevent individuals from forming businesses with the sole intention of minimising their tax liability by avoiding labour payments in favour of profits.
The government would rather encourage firm owners to collect dividends from shares kept in ISAs and pension plans. They want you to pay more in taxes, too.
In any case, a limited liability corporation is preferable to functioning as a sole proprietorship. Any competent accountant or tax expert will be able to help you strategize your compensation and tax obligations.
The National Insurance Payments for Classes 2 and 4
It is important to note that various forms of National Insurance do not apply to directors unless they are also shareholders and or they get additional untaxed income in addition to their wages.
Self Assessment is used by a wide range of persons to pay National Insurance, both Class 2 and Class 4, including:
those who work for themselves (i.e., sole traders and members of partnerships)
individuals whose earnings are exempt from taxation under the PAYE system (e.g., shareholders)
Class 1 National Insurance Contributions (NIC) are not deducted from some forms of taxable income under the PAYE system. This includes directors who receive expenditures, loans from the company, or bonuses that are not subject to taxation.
If your annual income is more than £9,880 between 5 April and 5 July and more than £12,570 after 6 July, you will need to pay Class 2 National Insurance. The price is £3.15 each week.
Your eligibility for the State Pension and other benefits depends on whether you are an employee or a self-employed business owner, thus it is crucial that you are paying either Class 1 or Class 2 NIC contributions.
Income in excess of the lower profits limit up to £50,270 is subject to 9.73% Class 4 National Insurance tax (upper profits limit). Earnings in excess of the maximum taxable profit rate are subject to Class 4 NIC at the rate of 2.73 percent.
When referring to a limited company's financials, what date should be used as the “reference date”?
If you are not a PAYE employee but yet receive shareholder dividends from the firm, the same rules apply to you. If this is the case, you'll need to sign up for Self Assessment, fill out a tax return each year to reveal your profits, and pay any applicable Dividend Tax and optional NIC.
