What every director needs to know

So it’s only reasonable that they earn a little more for this bargain. 

But what is the best way to be paid as a company director?

They can take 100% of their earnings as a regular wage but also have other options that aren’t available to other employees such as being paid in dividends and/or pension contributions instead. 

Each company and individual director’s situation will be different and their intentions will also differ. Some might want a reliable monthly salary being paid into their personal account but others might want to affect their company’s profits or tax bill, or their own personal tax situation.


Taking a regular salary from your business like the majority of your employees brings several benefits for a director. 

These include:  

  • Build up qualifying years towards a state pension
  • Make higher personal pension contributions
  • Retain maternity or paternity benefits (if applicable)
  • Easier to provide evidence if applying for mortgages or critical illness insurance coverage
  • Be eligible for redundancy payments if paid via PAYE
  • Reduce corporation tax liability (a salary is an allowable business expense for deduction)

Receiving salary remuneration means that the director and the company have to pay National Insurance Contributions (NICs) and will have to pay income tax at a higher rate than a dividend might incur. 

Income tax doesn’t have to be paid on earnings until it passes the personal allowance limit (currently £12,570) but National Insurance Contributions have to be paid if the income passes the NIC Primary Threshold (currently £9,564). 

In order to build up qualifying years for the state pension, salary must be at or over the NIC Lower Earnings Limit (currently £6,240).  

Some directors choose to set their salary level between the Lower Earnings Limit and the Primary Threshold, so are able to keep their state pension but avoid paying NICs as a result. 

When it comes to potential redundancy payments for directors, only PAYE salary is counted. If a company is facing a formal insolvency procedure then not only are directors not entitled to dividend payments but payments from the Redundancy Payment Service be more likely.


A dividend is most simply a share of the company’s profits and a legal alternative method of payment. 

The amount a director or other shareholder can receive is based on the proportion of shares they hold. There’s no requirement to pay all or any profits as dividends – a company can retain its profits over any number of years and distribute them according to a schedule the board decides. 

The main benefits of taking payment through dividends are: 

  • Dividends are paid at a lower rate of income tax than a salary
  • There are no National Insurance Contributions paid on dividends – neither employer’s nor employees) 
  • Dividends can be paid on whatever schedule the recipient chooses. Monthly, quarterly or annually are the most common but as long as there is profit, it can be whenever they prefer.

There is a tax-free dividend allowance of £2,000 which can be used in addition to the personal allowance so you can earn up to £14,570 before paying any income tax at all. 

While there can be some significant savings made on dividend income there are some other considerations to bear in mind. These include:  

  • Dividends can only be paid out of company profits. If the business doesn’t make a profit then no dividends can be drawn
  • Income can be unpredictable if profits vary 
  • Corporation tax has to be paid on profits before dividends are paid, unlike a salary which is a tax deductible expense
  • If a director accidentally takes a dividend that isn’t covered by profits then they will have to take out a director’s loan instead which will have to be repaid, potentially with interest
  • For the purposes of tax relief on self funded pension contributions, dividends are not counted as “relevant UK earnings”

Additionally dividend tax is set to rise soon. 

From April 2022, the basic rate of dividend tax will rise to 8.75% from 7.5%.  Higher rate dividend taxpayers will be charged 33.75% instead of 32.5% and additional rate dividend taxpayers will pay 39.35% instead of 38.1%.

The rises in dividend tax don’t get as many headlines as other tax rises coming in because they will affect fewer people but those paying themselves in dividends or running their own businesses will certainly notice.

Illegal dividends

While salaries can be paid even when a company is making a loss, dividends can only be paid from profits.

If there are insufficient profits in a company to cover the amount paid out then they are deemed to be illegal (also known as ultra vires dividends which means “beyond the powers”).

This can expose directors to personal liability risks so if the company is undergoing financial stress then the only money that can legally be paid would be a small salary. 

Because a dividend payment that cannot be covered by company profit becomes a director’s loan then there’s a risk that it could be classed as overdrawn at the end of the year. 

HMRC insists that any money taken out of the company as such a loan has to be repaid within nine months of the end of the corporation tax accounting period for the year. 

Failure to do this will see HMRC classify the overdrawn director’s loan account as income which means it becomes liable for both income tax and National Insurance payments.

Additionally, if the company enters an insolvency procedure such as administration, a company voluntary arrangement (CVA) or a liquidation then this money has to be repaid to creditors.  

Failure to do this could result in personal consequences including accusations of wrongful trading and the possibility of personal liability for this debt, fines and disqualification from acting as a director again for up to 15 years. 

Pension contributions

Another way to receive the benefits of tax efficient remuneration comes in the form of pension contributions paid directly from the company.  This is distinct from contributing to your pension directly as it counts as an employer pension contribution. 

Some of the other advantages of taking employer pension contributions in this way includes: 

  • Pension contributions don’t add to income so won’t increase the tax bill
  • As an allowable business expense, they can save up to 19% on corporation tax
  • There are no employer National Insurance Contributions to pay which saves another 13.8%
  • Employer pension contributions aren’t limited by salary size

The final point is a critical one to understand. Individuals aren’t allowed to pay more into a pension in one year than they receive in salary.  So if a director is receiving a small salary as well as dividends then they couldn’t pay very much into their pension. 

Employer pension contributions aren’t limited in this way. 

They are only limited by the annual allowance limit (currently £40,000) so any company can contribute up to this pension amount even if they are drawing a small salary in comparison. 

The biggest downside of taking remuneration in pension contributions is that they can’t be accessed until the recipient turns 55. 

So they can’t be used instead of a salary or dividends but as an addition to them.

Bounce back loans

Another new factor that has appeared in the past 18 months is the introduction of bounce back loans as part of the pandemic support measures rolled out by the government. 

If a business has taken out a bounce back loan and used it to pay salaries, dividends or directors loans then this could affect what happens in a liquidation process. 

The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill finally gained legal ascent at the end of last year and the Insolvency Service has wasted little time in using the additional powers it granted them. 

One of the main ones is allowing them to further investigate the actions of directors of dissolved companies to establish what happened leading up to the striking off and whether the business had an outstanding bounce back loan or any other debt.  

They are no longer time limited so can go back several years to find if any directors had breached any of their statutory duties.

Chris Horner, insolvency director with BusinessRescueExpert, said: “The bounce back loan deliberately had a wide-ranging remit regarding its use but this is not totally unlimited. 

“It’s use was to provide an economic benefit to the business during the pandemic. 

“This can include purchasing new equipment or machinery, investing in other tangible assets, paying down existing debt or using it to pay for staff costs and wages including salaries.

“As long as directors can demonstrate that the loan was used on reasonable and legitimate company expenses or business purposes including a salary then they will have little reason to worry about any potential investigations. 

“If it was used to pay dividends then the situation could become more complicated depending on the circumstances and we would definitely recommend seeking professional advice to fully explore the case and dispel any threat of personal liability to the directors.”

Being a director might be the most rewarding position in a business but it comes with a price. 

The level of responsibility, decision making and longer term planning and thinking required is essential to the position as well as statutory duties and standards that also have to be adhered to.

And for many, there is also a full time day job within the business to manage as well!

Payment or remuneration is one of the advantages that make up for the additional burdens of management and leadership. 

Like most decisions it shouldn’t be taken lightly or without professional advice from an accountant. 

But for businesses that have been decimated by the pandemic and associated economic fallout and are facing real difficulties, dividend payments and bounce back loan debt could be seen as an additional obstacle either to the company’s future or its efficient closure. 

We offer a free consultation to any director or business owner that wants to discuss their situation in more detail and wants guidance on how to deal with current problems or seek guidance about how their decisions during the lockdowns have impacted on their ability to restructure or shut down their business properly. 

We’ll arrange a convenient time for a virtual meeting and then they can use the new information and knowledge to act, fully informed on what they can do for their and their company’s best future interests.