Understanding PAYE and dividends in the UK for directors

In recent years, an increasing number of company directors have chosen to receive their compensation in the form of dividends rather than being paid through the PAYE system. The rationale for this is obvious: they are not required to pay National Insurance Contributions on this \'income,\' and capital gains tax is often lower than income tax on the same amount. Their ultimate goal is to increase profits while paying lower taxes.

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Some dividends are deemed illegal

Unfortunately, the legislative procedures for receiving dividends are extremely complicated, and the common director or owner lacks the legal understanding to grasp what constitutes a ‘legal dividend.\' In brief, if a firm goes bankrupt and any dividends given are discovered to be illegal, the director is obligated to repay the money! In this case, it\'s also a good idea to look into D&O insurance, which can shield you from such claims if you\'re judged personally accountable as a director.

Illegal dividends must be paid back

At this point, the director is perplexed as to why he or she should be obliged to return the money since it should have been their wage.

If you’re not yet an Accotax (Accountants in London) client, we can make paying yourself tax-efficiently easy, with all your HMRC payroll and dividend forms taken care of. Even better, you’ll get all the support and advice you need, plus all your company tax filing taken care of. We can even prepare and file your annual Self Assessment tax return. Find out more about our great-value Limited company accountants Packages.