Are you employed or self-employed if you have your own company?

December 1, 2022

What’s your status exactly?

The confusion around one’s position in their company never fails to haunt business owners at the start of their journey. They always wonder what is better, to be an employee in their own company, or to be considered self-employed. They are also considering the impact of their new role on their tax liabilities, and National Insurance. 

What is your employment status as a director and shareholder?

When you form your limited company and start running it as a director and shareholder, then you are technically both an employee and self-employed (because you work for yourself). However, legally speaking, it’s quite different. You are not considered self-employed for tax purposes and that’s where many people get confused. 

The reasoning behind this is the company type. Being a sole trader means that you and your firm are one entity. Whereas having a limited company means that you as a business owner and your company are two separate entities. 

Put simply, being a company director means that you are an officeholder and employee for tax purposes. You are also required to work on behalf of the firm and for other stakeholders (if any). In return, you are paid a salary which is taxed through HMRC’s system PAYE (Pay As You Earn). As a shareholder, you are deemed the beneficial owner of the firm and receive your income in the form of dividends. 

More often than not, business owners opt for dividends over a director’s salary due to the fact that in most cases, the tax liabilities for a shareholder are much less than what a director would pay from income tax and National Insurance. 

How much tax do you pay as a director?

You receive your income as a company director through payroll, minus the National Insurance Contributions through HMRC’s system, PAYE (pay as you earn). Depending on how much you earn, you need to follow HMRC's guidelines for each income threshold. 

How much tax do you pay as a shareholder?

Being a shareholder means that the money you receive is categorised as investment income and is called dividends. The way taxes are paid for dividends is different from a director’s salary. Dividends are paid from profits, meaning the money left after the Corporation Tax is deducted. The great thing about dividends is that you do not have to pay any form of income tax or National Insurance Contributions on the dividends you receive!

What is better for you, salary or dividends?

Get in touch with our accountants at Elena Meskhi and Co to find out what is more beneficial for you. 

Book a discovery call here.

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