HOW SHOULD YOU PAY YOURSELF?

As outlined in the previous chapter, your status within your company can vary.

As the founder and managing director of a limited company, you have company director status, and should also have employee status.

You will not be self-employed, as that would mean you were a sole trader rather than a limited company. This can sometimes be confusing​if​you​have​worked​as​a​freelancer​for​years!

I would advise that you make sure you are an employee of your company as well as being an office holder, which is the automatic designated status from being a company director. This is because office holders do NOT have the same rights as employees. Given that you will be doing most of the grafting, and hopefully paying yourself​for​it​out​of​projects,​it’s​safe​to​say​you​are​an​employee,​

but​give​yourself​a​contract​of​employment​just​to​be​safe.

Make sure you are aware of the rights and benefits attached to your employment status, as they can vary.

As an employee you have the following statutory rights. This applies to you as a PAYE employee, and to your staff who are PAYE employees.

Some of these are based on EU law, so watch this space post- Brexit:

• getting the national minimum wage (this means you also need to pay yourself the national minimum wage, as an employee)

• protection against unlawful deductions from wages

• the statutory minimum level of paid holiday (good luck with that in the​first​two​years​of​your​start-up!)

• the statutory minimum length of rest breaks

• to not work more than 48 hours per week or to opt out of this right if you choose

• protection against unlawful discrimination

• protection for reporting wrongdoing in the workplace (whistle- blowing)

• to not be treated less favourably if you work part-time

• Statutory Sick Pay

• Statutory Maternity, Paternity, Adoption and Shared Parental Leave and Pay

• minimum notice periods if your employment will be ending

• protection against unfair dismissal

• the​right​to​request​flexible​working

• time off for emergencies

• statutory redundancy pay

Most​of​this​also​applies​to​‘workers’,​who​are​of​similar​employment​

status to employees but more casual. The exceptions for workers are that they do not get minimum notice periods, unfair dismissal, redundancy​or​flexible​working.

You can be simultaneously self-employed and employed, or a worker and employed – if you have different positions.

In reality, many of the people you employ will be seen as workers or employees in law, rather than as freelancers.

Generally these rights do not apply to self-employed people, but be very careful about this employment status in law. Even if you are​paying​someone​as​a​self-employed​‘freelancer’,​they​could​in​

fact be seen as a worker or employee in law and could take you to a tribunal to claim these rights if they feel they have been given the wrong employment status in your company. If they are successful in doing this, you may owe them and the government back payments.

When​you​are​hiring​staff,​use​the​Employment​Status​Indicator​

on the HMRC website to keep yourself right, and make sure your business does not get dragged down by tribunals and fines or back payments.

Often, accountants will suggest that you pay yourself and your co-directors a low salary up to the legal tax limit, and the remainder through dividends, which are taken from profit within the company and can receive tax relief and a lower tax rate, as outlined above.

This means that you retain employee status but pay less tax.

There are some things to bear in mind with doing it this way. First, you need to take dividends out of overall company profit, so if you go​over​budget​on​projects​or​have​losses​from​previous​years​and​

are​not​in​profit​you​can’t​pay​yourself​this​way.​Creative​companies​

have​ a​ notoriously​ unpredictable​ turnover​ and​ cash​ flow​ so​ just​

make​sure​it’s​realistic​to​assume​you​will​be​in​profit.​It’s​very​hard​

to​predict​just​how​creative​projects​will​go​and​they​have​a​nasty​

habit​of​going​over​budget!

So you can choose to pay yourself both ways, i.e. pay a basic wage PAYE and then give yourself a dividend according to profit within the company, and many directors choose this method as it is very​practical​but​it’s​also​a​case​of​getting​the​balance​right.​The​

dividends you can afford to pay yourself will vary so you need to be aware of that and make sure the basic wage is enough for you to meet all your outgoings, or that you have savings to fall back on.

Second, you might find it a pain when you have to take on various types of personal administration – mortgage lenders and the like – because they look for traditional PAYE employment records. I often found that it was easier for me to keep track of money by paying myself​directly​out​of​project​budgets,​as​a​PAYE​employee​of​the​

company.

If you are paying yourself dividends, be aware that you also have to pay your co-shareholders a dividend, commensurate with their share ownership.

So for example: you have 50 per cent of the company and a shareholder has 50 per cent. You pay yourself a dividend of £1,000.

Your other shareholder should then be paid a dividend of £1,000 as well.

Paying yourself PAYE means that you are, to all intents and purposes, an employee of the company and you will receive a monthly salary from the company. You also need to have something called​ a​ Director’s​ Service​ Contract​ in​ place​ which​ details​ your​

hours and pay. Your pay can vary from month to month, as long as you keep accurate records, but again, it is useful to have a regular salary when you are, for example, buying a house. In this case you or your bookkeeper will need to do something called a Real Time Information monthly tax submission, which we will look at in detail later in this chapter.

Talk to your accountant, and HMRC if necessary, about this in detail before making any decisions.