- Payment, expenses and service contract
- Must a director be paid?
- Who determines the directors' fees (if any) and terms of their contracts (if any)?
- Does HMRC treat the remuneration of executive directors and non-executive directors in the same way?
- What part of a director's fee is payable to a director who resigns part-way through a year?
- I am a director and the sole shareholder. Can I take as much money out of the company as I like?
- As well as being a director I own all the shares. I want to pay out all the profits to myself as a salary or bonus. Will there be any problems if I do this rather than pay a dividend?
- My company faces financial difficulties. How much should this be a factor in setting directors' pay?
Payment, expenses and service contract
Must a director be paid?
There is no presumption in company law that a director will be paid. Many are but some are not. Remuneration, if any, is only paid as a consequence of an agreement between the director and the company.
An executive director is an employee and is therefore presumably entitled to the minimum wage, though this has not been properly tested.
A non-executive director is not an employee and the minimum wage is therefore not applicable. An interesting but untested point is the position in a company with just one director who is an executive director, but who opts not to be paid. Perhaps he is a sole or major shareholder and takes his reward in the form of dividends. It is possible that an offence is committed if he is not paid the minimum wage.
Who determines the directors' fees (if any) and terms of their contracts (if any)?
It depends on the articles, but usually the directors themselves determine how much they will be paid and the terms of their contracts. This is the position if the new model articles apply.
Does HMRC treat the remuneration of executive directors and non-executive directors in the same way?
Yes it does. It is the adamant view of HMRC that all payments to executive and non-executive directors are subject to deductions under PAYE. Furthermore, they are treated in the same way for national insurance purposes.
What part of a director's fee is payable to a director who resigns part-way through a year?
It depends on the articles. Regulation 82 of Table A provides that unless the members decide otherwise, remuneration shall be deemed to accrue from day to day, and the new model articles are the same in this respect.
If the principle does apply, if a director is to receive £10,000 for each calendar year and if he resigns on 30th June, he is entitled to £5,000.
I am a director and the sole shareholder. Can I take as much money out of the company as I like?
The answer is yes, but subject to some important restraints and warnings:
You must not take so much money that the interests of creditors are threatened. In particular, you must pay dividends out of net distributable reserves and not out of capital.
It would be wise to carefully consider investment plans and the company's future requirements for cash.
Any other directors have the right, and indeed the duty, to participate in making the decisions and to act in the interests of the company.
As well as being a director I own all the shares. I want to pay out all the profits to myself as a salary or bonus. Will there be any problems if I do this rather than pay a dividend?
You can in principle pay yourself a very large salary or bonus, or you can take the money in the form of a dividend. The decision can be based on what you want to do but tax treatment, which may vary from year to year, may well be a factor. Despite this general freedom to do as you wish, due regard must be given to the following constraints:
The correct formalities must be followed. Each director probably has an equal vote, even if you do own all the shares.
Whatever you do the correct declaration to HMRC must be made and the correct tax paid.
You must not pay yourself so much that the solvency of the company and the interests of creditors are threatened.
You must act in the interests of the company as a whole. If you own 100 per cent of the shares there is not a problem, but there is a problem if there is a minority shareholder. A minority shareholder would get a pro rata share of a dividend but no part of your salary or bonus.
My company faces financial difficulties. How much should this be a factor in setting directors' pay?
This is a nasty dilemma but let me start by offering my sympathies. A laborer is worthy of his hire and a director is worthy of his salary or fees. It is fair and usually good business practice to pay fair and competitive salaries and fees to directors. On the other hand, directors owe a duty to their company and its members. It is not in the interests of members to pay salaries and fees that result in the insolvency of the company, even to good directors for good work. The answer, therefore, is that it should be a factor but by no means the only one.