When it comes to paying directors, companies often face a complex interplay of financial and tax considerations. The goal is to compensate directors fairly while minimising the tax burden on the company. And there’s a whole number of ways to approach this:
Salary and Benefits:
- Salary: This is the most straightforward way to pay directors. However, it’s subject to income tax and National Insurance Contributions (NICs).
- Benefits: Offering benefits can be tax-efficient for both the company and the director. Consider options like company cars, pension contributions, and private medical insurance. These benefits may be exempt from income tax or NICs, or the company can claim tax relief.
Share-Based Schemes:
- Employee Share Ownership Plans (ESOPs): These plans allow directors to acquire shares in the company at a discounted price or with performance-based conditions. The tax treatment depends on the specific scheme and the director’s circumstances.
- Performance-Related Share Options: These options give directors the right to purchase shares at a predetermined price in the future, often subject to achieving specific performance targets. This can align directors’ interests with the company’s success and potentially offer tax advantages.
Pension Contributions:
- Company Pension Schemes: Contributing to a company pension scheme can be a tax-efficient way to reward directors. The company can claim tax relief on its contributions, and the director’s contributions may also be eligible for tax relief.
Expenses:
- Reimbursement of Expenses: The company can reimburse directors for legitimate business expenses incurred on its behalf. These expenses are generally tax-deductible for the company and not subject to income tax for the director.
Loan Charges:
- Interest-Bearing Loans: In certain circumstances, a company can provide interest-bearing loans to directors. The interest paid can be a tax-deductible expense for the company, and the director may be able to claim tax relief on the interest received. However, careful consideration must be given to the potential implications of these loans.
Consulting Fees:
- Engaging Directors as Consultants: If a director also provides consultancy services to the company, the company can pay consulting fees for these services. This can be a way to supplement their income while potentially offering tax advantages.
Dividend Payments:
- Dividend Payments to Shareholders: If a director is also a shareholder, the company can pay dividends. Dividends are generally subject to a lower tax rate than salary income. However, it’s important to consider the company’s overall dividend policy and the potential tax implications for the director.
In the end, the choice of how you reward your directors will be a mix of company needs and their needs. You may be at early-stage and cashflow may be limited, so equity share might help, or the directors might simply want paying, like normal people.
Working out your best strategy is something best discussed. Get in touch and we can discuss it, both as part of your wider business strategy and as part of your bid for company and personal tax efficiency.
