You don’t have any employees so employment law doesn’t apply to you, right? You’re self-employed.
Legally, you’re not self-employed if you have your own limited company. The company is a separate legal entity to you and so your role as director is both as employer and employee. You employ yourself, and you’re employed by yourself.
This is less complicated than it sounds; however, there are some rules you need to follow.
Step 1: You’re a director and an employee
You’re in charge and you decide what happens in your company. Because you’re the boss and an employee, HMRC has rules to stop you taking unfair advantage.
The main rule is about national insurance. Any national insurance due on your salary is calculated looking at how much you get paid annually and not just when you get paid. Previously, some directors didn’t pay national insurance because of the way they structured their salary.
Step 2: You know why you’re paid your salary level
Most directors are paid a certain salary to minimise the amount of national insurance they pay. This is legal and standard practice. Your company is required to pay employer Class 1 national insurance contributions on employee’s salaries, and you as an employee are required to pay employee Class 1 national insurance contributions on your salary. If there is only you, that can add up.
National insurance contributions are important because they are how you get credits for claiming sick pay, maternity pay, state pension and certain benefits. There is a certain salary level that gains you national insurance credits without paying a lot in national insurance contributions. This amount changes each year and is currently approximately £8k pa.
The salary you pay yourself is an important aspect to be considered, and the salary level isn’t right for everyone’s personal tax circumstances. If you are in the first few years of business, may make a loss or want a mortgage in the next few years, it can be sensible to explore other options. It may even save you money overall, even if you pay more national insurance in the short term.
Step 3: Dividends. Have you ticked the boxes?
You may be thinking £8k salary isn’t a lot to live on and you’d be right. You can choose to leave profits in your company or you can take some out for your personal living expenses.
Dividends are the money that is left in your company from profits AFTER tax.
Important legal tick box 1 – Make sure your company has enough money to pay your director dividend once it’s paid the corporation tax due. If your company doesn’t have that money, the dividend isn’t legal.
Important legal tick box 2 – Dividends are not salary. Opinion is divided on whether monthly dividends are OK or not. If you’re reading this, I hope you’re the kind of business owner who knows how valuable it is to understand your business tax, so ask your accountant for more details and then you can make the decision.
There are other tick boxes. However, they’re dependent on your business’s individual circumstances. Ask your accountant if you’d like to know more.
Step 4: Who does your self assessment?
Despite what HMRC may have you believe, it is not a legal requirement for every company director to submit a self-assessment tax return. It is a legal requirement if they send you a demand to file, so you must do it if they ask you to.
It is not a tax-deductible expense to get help with your self assessment if you are a director of a limited company. If your accountant does it for you, make sure you know what they are saying on your behalf. If you’d prefer to submit your individual tax return yourself, have a look at The Tax Return Toolkit. It’s not difficult if you only have income from your salary, a few dividends and a bit of savings interest.
Step 5: Acronym alley: PAYE RTI
PAYE (Pay As You Earn) RTI (Real Time Information). This is how you pay yourself your salary.
Most people are familiar with PAYE as it’s how we’ve been paid by employers. What it means is that every month your company needs to tell HMRC what it is paying its employees (that’s you). You can’t file one piece of paper per year, any more.
RTI is new and still in the teething, screaming at its parents and needing Bonjela stage. If you have a PAYE problem, don’t assume it’s your fault. Ask your accountant for help to sort it out for you. HMRC is getting used to the new system too.
It’s a good idea to have your payroll run by someone else until RTI settles down. It’s not expensive and if there is a problem, they’ll sort it out for you. Once all is calm again, payroll isn’t difficult to do yourself, although most accountants and payroll services will do it for you for very little.
Action: know what is happening, and why, in your company
Knowing what is happening with your employment at your own company is worth investing in.
Leaving simple-to-do tick boxes unticked can mean legal hassle and penalties that get in the way of your business and could mean you’re trading insolvent (which is illegal). It’s easy to prevent and not easy to fix.
Understanding why you’re paid what you’re paid is an important personal and business decision. Don’t leave the decision to your accountant or just do what everyone else does. You’re you, not them. Especially look at this if your company is new, running a loss or you want a mortgage in the next 3 years.
What is one action you can take now to take your company forward to having confidence and clarity about being an employer and employee of your company?