Back to Tax Basics: Income tax for directors

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. This means being aware of your tax responsibilities as a director. For example:

• On top of any salary you receive, you may also receive 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 need to be combined on your self-assessment tax return so that HM Revenue & Customs (HMRC) can determine and manage your total personal tax liability.
• There is often a trade-off 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.
• To strike the optimum balance, any sources of income outside the company should also be considered.
• Dividends are considered 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 want to withdraw the funds.

Submitting your annual tax return

Once you’re registered for self-assessment as a director, you’ll need to submit a tax return annually – doing this, at the latest, by 31 January after the tax year-end.

• Any balance of due tax needs to be settled by 31 January, with a payment on account towards the next year’s liability. That will be followed up at the end of July by a second payment to the account.
• Ideally, your tax liability (the amount of money you’ll owe to HMRC) should be known well before the final 31 January deadline. Not only will this help ensure there are no sudden surprise bills, it will also give you time to consider any tax-reduction options.
• For example, using 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 they have the time and the knowledge. But there’s a real added value to working with an accounting firm that handles the company tax work and your 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.

Please note: This is not meant to constitute professional advice. It is generic guidance only and things may have changed since it was written –please always seek specific & tailored advice for your circumstances.