Self Assessment for Directors
Contrary to popular belief, directors do not automatically need to register for Self Assessment. The need to register largely depends on the nature of your income. If you are a director with untaxed income, such as dividends from shares in your own company, you need to register for Self Assessment.
Self Assessment allows you to report untaxed income and pay any necessary tax.
Salary and Dividends
Directors who are also shareholders typically receive a combination of salary and dividends. Here’s how each income type works:
Salary: Directors can draw a salary for their role. If the salary meets or exceeds the Lower Earnings Limit for National Insurance (currently £6,396 for 2024/25), the employer processes it through PAYE (Pay As You Earn). Salaries processed via PAYE will have tax and National Insurance Contributions deducted as income.
Dividends: As a shareholder, you may also receive dividends, and the company pays them from its post-tax profits. The government taxes dividends at a lower rate than standard Income Tax. Since the company already partially taxes dividends at the corporate level, the Self-Assessment process treats them differently from salaries.
PAYE Requirements for Directors’ Salaries
If you choose to pay yourself a salary, it must comply with PAYE regulations if it exceeds the Lower Earnings Limit. As a director, the law considers you an “Office Holder” rather than an employee, meaning minimum wage laws do not apply. You must register for PAYE if your salary meets the threshold.
Including Dividends in Self Assessment
PAYE does not tax dividends, unlike salaries. Therefore, if you’re a director receiving dividends, you must declare them in your Self Assessment tax return. Dividend tax rates are also generally lower than income tax rates. The Dividend Tax Rates for 2024/25 are as follows:
- Personal Allowance: 0% (up to £12,570)
- Basic Rate: 8.75% (£12,571 – £50,270)
- Higher Rate: 33.75% (£50,271 – £125,140)
- Additional Rate: 39.35% (over £125,140)
Directors’ Pensions and Self Assessment
The tax treatment of pensions depends on the type of pension scheme and the method of contribution:
- PAYE Contributions: Taxed at source, generally not requiring further reporting.
- Post-tax Contributions: The pension provider might add an amount to cover the tax already paid.
- Pre-tax Contributions: Contributions are tax-free, and the pension provider doesn’t add anything back.
Benefits and Gifts
Some benefits, such as a company-provided mobile phone or a £500 allowance for pension advice, are not taxable. However, you may need to pay tax on something like a company car so you should include it in your Self Assessment. For a complete overview, your company should provide you with a P11D form outlining taxable benefits.
Directors’ Loan Accounts
If you withdraw funds from your company that aren’t classified as salary or dividends, the company generally records it as a director’s loan. If you’ve taken out a director’s loan, make sure to repay it within the specified time or declare it in your Self Assessment to avoid additional tax charges.
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