Recruitment Company Directors! Are you paying yourselves tax efficiently?
As the recruitment industry really begins to pick up following the pandemic, many recruitment companies will be making significant profits over the coming years. Consequently, recruitment company directors are now faced with the dilemma of how to pay themselves tax efficiently following a few years of low earnings and tax.
The 2 most common ways a director can be paid are:
Being paid via the PAYE scheme of a company is recommended for all company directors (providing the director is not on a PAYE scheme elsewhere). Effectively, it is recommended that directors pay themselves up to the earnings limit before the employer and the director pay national insurance; this equates to £8,844 (21/22 tax year) annually. This is not much; however, it is tax efficient for both the company and the director. For the company this is a deductible expense for corporation tax (thus saving 19% corporation tax on this figure) and ensures they do not pay any employers national insurance. For the company director it is also tax efficient as it’s below the limit for any employee national insurance to be paid.
To then top up earnings, it is recommended that company directors pay themselves via dividends. The reason for this is because via the PAYE route, pay would be taxed at 20% and 40% for basic rate and higher rate taxpayers. Whereas the dividend route means the company director will only pay 7.5% and 32.5% (dividend rate tax) for the basic rate and higher rate tax brackets.
Some key points to note:
- Dividends are not tax deductible for the company – i.e., dividends cannot be taken off profits and do not save on corporation tax
- If annuals earnings are above £100,000 the personal allowance is reduced – for every £2 above £100,000 the personal allowance is reduced by £1. This can be a real problem for recruitment company directors in the coming years as profits from the buoyant recruitment industry are drawn from the company.
- For earnings above £150,000 dividends are taxed at the additional rate of 38.1%
Effectively, the most tax efficient way a recruitment company director can pay themselves is using a combination of both dividends and salary. Other considerations recruitment company directors can make to pay themselves are:
- Pension contributions – these are tax deductible for the company (up to the annual limit) and so save on corporation tax for the company
- Company cars
- Fuel and mileage allowances
- Oher benefits – health insurance, childcare
In summary, recruitment company directors need to assess the level of annual income required and use a variety of methods to pay themselves to be as tax efficient as possible.