When you're a company director, it's important to understand the distinction between paying tax on your company profits and tax on your own income. You will pay corporation tax on your profits as a business, and as a director, you'll also need to pay tax on your personal income as a director, via the self-assessment income tax system.
The key things to know about directors' income tax
As a director, you're not only responsible for ensuring that your company's tax affairs are in order. You also have to manage your own personal tax situation properly too. This means being aware of your tax responsibilities as a director. For example:
- On top of any salary that you receive, you may also be receiving dividends from your company. It's possible that you'll have other external sources of income too, such as interest on savings accounts, property income and other investment income.
- These different income streams all need to be brought together onto your self-assessment tax return so that your total personal tax liability can be determined and paid to HM Revenue & Customs (HMRC).
- There is often a trade-off to be made between taking income out of the company as profits and as dividends, as well as the need to consider whether or not the company should make pension contributions on your behalf. You can read more about this here
- To strike the optimum balance, any sources of income from outside of the company should also be taken into consideration.
- Dividends are considered to be paid at the point at which they're credited to your Director's Loan Account in the company's books. Because of this, there will be circumstances in which dividends can be declared to achieve a favourable tax outcome even if you don't actually want to withdraw the funds.
Submitting your annual tax return
Once you're registered for self-assessment as a director, you'll then need to submit a tax return on an annual basis - doing this, at the latest, by 31 January after the tax year-end.
- Any balance of tax that's due needs to be settled by 31 January, together with a payment on account towards the next year's liability. That is followed up at the end of July by a second payment on account.
- Ideally your tax liability (the amount of money you'll owe to HMRC) should be known well in advance of the final 31 January deadline. Not only will this help ensure there's no sudden surprise bills, it will also give you time to consider any tax-reduction options.
- For example, making use of the Enterprise Investment Scheme provides a certain amount of tax relief, where amounts you've invested in any year can be used to reduce the previous year's tax liability.
Talk to us about planning your directors' income tax
It's possible for directors to handle their own tax affairs, if you have the time and the knowledge. But there's real additional value to working with an accounting firm that handles both the company tax work and your own personal directors' assessments and returns.
If we don't already handle your personal tax returns, talk to us about the benefits of us taking on your personal tax work in the future - it's a move you won't regret.
Get in touch to talk about your personal taxes