Directors’ Remuneration is the total compensation a director receives for their work. This includes more than just a salary.
A typical package may include:
- Salary or director’s fees
- Performance-based bonuses
- Pension contributions
- Share options or equity incentives
- Benefits In Kind (such as a company car)
Some directors also receive dividends. However, dividends relate to share ownership, not director duties. Therefore, they fall outside remuneration.
This distinction matters, as salary and bonuses count as business expenses. Whereas, dividends come from post-tax profits.
Who Decides Directors’ Remuneration?
The decision process depends on your company structure.
- Private companies usually set remuneration through the board or their Articles of Association
- Public companies require shareholder approval and annual reporting
In both cases, you must follow proper procedures. Directors should declare any conflicts of interest. The board should then record decisions in meeting minutes.
In larger companies, a remuneration committee may also take responsibility. This committee reviews pay structures and also promotes fairness.
Legal Rules to Follow
You must follow several legal requirements when setting directors’ remuneration.
Companies Act 2006
This law forms the foundation of UK company rules, which requires:
- Proper authorisation of all payments
- Directors to act in the company’s best interests
- Disclosure of remuneration in company reports
Directors must also avoid conflicts of interest. This rule applies strongly when they set their own pay.
Tax and Employment Rules
Directors often act as employees, so you must:
- Process salaries through PAYE
- Apply Income Tax and National Insurance
- Report Benefits In Kind correctly
Pension contributions and share schemes follow specific tax rules.
Disclosure and Transparency
Companies must keep accurate records of all payments. Larger companies must also publish detailed remuneration reports. Clear records help avoid disputes, while also building trust with shareholders and regulators.
What Should a Directors’ Remuneration Package Include?
A well-structured package balances reward and performance. It should also align with business goals.
Common elements include:
- Base salary for regular income
- Bonuses linked to performance targets
- Pension contributions for long-term planning
- Equity incentives to encourage growth
- Benefits In Kind for additional support
You should clearly define each payment. For instance, outline how bonuses are calculated and when payments apply.
You should also consider how each element supports company strategy. This ensures the package remains effective.
Tax Considerations
The structure of remuneration affects both the director and the company.
For directors:
- Salary and bonuses attract Income Tax and National Insurance
- Benefits In Kind carry tax liabilities
- Dividends follow separate tax rules
For companies:
- Salaries and pensions usually reduce Corporation Tax
- Employers’ National Insurance Contributions apply to most earnings
- Benefits trigger Class 1A National Insurance
Careful planning can improve tax efficiency. Many businesses use a mix of salary and dividends to manage outcomes. However, you must ensure compliance at all times. Poor planning can lead to penalties or tax investigations.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.