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How Does a Company Director Get Paid?

By FastLane Team, December 19, 2022 (5 mins)

Introduction


If you successfully launch a business, you can live quite comfortably. Though it’s important to remember that being a company owner comes with its challenges, as you will be held mainly responsible for the successes and failures of the business. Often times, you are both the sole shareholder and director of the company.

 

However, the best rewards come from knowing you have built a successful organization that makes you rich and happy. If you’re up for the challenge, let’s explore how could you get paid as a company director.

 

What you’ll learn:

1. How can you draw income from the company as a director

           1.1 Pay as you earn

           1.2 Dividends

           1.3 Director’s loan

2. Details about directors’ fee

3. Key takeaways

How can You Draw Income from the Company as a Director?


It is crucial to remember that a limited company and a sole proprietor are two distinct legal entities when it comes tothis situation. When you operate by yourself, the entire profit made goes to you and can be viewed as your income; however, this rule does not apply to limited companies. There are three main methods you can use to withdraw money from the company account as CEO:

 

 

The method in which you receive payments and the frequency of those payments vary by business, but some methods offer more tax advantages than others. We will cover each of these three methods in depth below, as well as examining director’s fees as a method of payment. 

How Does a Company Director Get Paid? | FastLane

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Pay as you earn (PAYE)


PAYE is the most fundamental way to get paid if you are a director of a limited company. The reason this method is so popular is because even the director falls under the “employee” umbrella. However, it should be noted that PAYE varies regionally, and is often administered by government organisations in charge of tax collection. 

 

With a regular job, you would normally receive your pay on a weekly or monthly basis. You would run a payroll, submit your figures to the responsible government body, and pay yourself the net amount. First, you must register as an employee. After registering successfully, you will then need to start submitting reports before each payday about every employee, including yourself.

 

Also, keep in mind that company directors are usually taxed like other employees.

 

Dividends


This method is entirely different from PAYE, to take advantage of it, you must be a shareholder and directors of the company.

 

Dividends are payments made to shareholders, but only when the company has profited and the directors have agreed upon it. They’re often paid once or twice a year, though again, that decision rests with the board. A few things to consider before using dividends as a method of payment:

 

  • The company must have a surplus of profit to issue and pay the dividends.
  • A meeting must be scheduled to discuss the possibility of issuing dividends.
  • After the board approves it, we file the dividend payment paperwork at the registered office.

 

Always keep in mind that the directors of profitable companies, who pay taxes and have a large amount of saved cash, almost always use this method. This is easy to understand when you think about it. Dividends, which are a portion of the company’s profits after corporation tax, can be distributed to shareholders as income. Taking advantage of this is an incredibly efficient way to optimise your personal tax liability. 

 

Even if you are earning more than the amount specified, you could be taxed at a lower rate if you receive the money as dividends rather than salary. Lastly, since dividends offer various tax advantages as well as disadvantages. Thus, it is always best to speak with the company accountant before coming to a conclusion.

 

Director’s loan


A loan from your limited company is an easy way to get paid, but if the process isn’t managed properly, it can lead to negative consequences. Although this method is neither a salary nor dividend, you will still be paid the money.

 

To begin, every director’s loan transactions must be noted in a separate account designed for this purpose. This way, there is always a record of the financial exchanges between the director and company. If the director has put more money into the company than they have taken out, their account balance will be in credit. However, if they have withdrawn more funds than what was initially paid in, then the account will be overdrawn. 

 

Lastly, every transaction made in the loan account must be accounted for in the company’s balance sheet. Furthermore, some or all of these transactions may have to be included in the company tax return and/or the director’s self-assessment return. As long as the debt is repaid within nine months of the company’s account reference date, directors with overdrawn loan accounts generally don’t have to pay any income tax. 

How Does a Company Director Get Paid? | FastLane

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Details about director’s fees


A director’s fee is one of the ways in which a director gets paid for their services, so it is important to know a few key things about them. Although director’s fees are recompense for their services, to qualify for these payments, the recipient cannot be an employee of the company and must adhere to certain procedural guidelines.

 

These fees go towards travel, meeting attendance, and other such expenses related to being a director. Just keep in mind that your company’s shareholders get the final say on whether they’re fine with shelling out these payments under the Corporations Act. Furthermore, it is essential to go over the procedural requirements for the director’s fees.

 

For example, in Hong Kong, a director’s fee is always taxed as income. Even though taxation is normally based on the principle of territory in Hong Kong, it does not matter if the director is located inside or outside Hong Kong. Furthermore, whether the person is a resident or not is irrelevant. Therefore, as payments are made to employees every April, the company must also declare the director’s fees in the Employer’s Tax Return to IRD.

 

Key takeaways


In conclusion, there are a few excellent methods to get paid through your business, but the best plan for you depends on your circumstances and what you value. While there’s no universal way to avoid paying taxes, some methods are more effective than others. You’ll need to decide what works best for you based on your individual circumstances.

 

If you are unsure about anything related to this topic, the best thing you could do is reach out to professional companies like FastLane. Let us help you find the best accounting solution for your company that also benefits you personally. We have experts in this field who can offer great advice. Contact us today to know how we can help your business.



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