Director's Salary, Fee, Dividend:
3 Ways to be Paid, Which is the Best?
Director’s Salary vs. Fee vs. Dividends—this was the biggest question on James' mind as he grew his business.
Meet James, a Company Director. How should he pay himself in the most tax-efficient way?
He had three options: take a salary, receive director’s fees, or pay himself through dividends. Each had different tax implications, and choosing the wrong one could cost him thousands. Let’s explore James’ dilemma and find out which option works best.
Option 1: Taking a Salary
A salary is the most straightforward way to receive income. It provides stability, is subject to Income Tax and National Insurance, and qualifies for Central Provident Fund (CPF) contributions.
Pros:
- Predictable income with regular payslips
- Contributes to CPF (if applicable) for future security
- Helps with personal loan or mortgage applications
Cons:
- Subject to higher tax rates compared to dividends
- Increases company payroll costs
James liked the security of a salary but worried about high taxes. So, he looked at director’s fees.
Option 2: Director's Fees
Director’s fees are payments made to directors for their services and responsibilities. Unlike a salary, they are not tied to a contract and must be approved by shareholders.
Pros:
- Tax-deductible for the company
- Can be taken as a lump sum rather than monthly
Cons:
- Subject to Income Tax
- Requires shareholder approval
James realised that director’s fees provided flexibility, but they were still taxed at standard rates. He wondered if dividends were a better option.
Option 3: Paying Yourself Through Dividends
Dividends are payments made from company profits to shareholders. If James paid himself via dividends, he would only be taxed on the dividend income and not have to pay CPF contributions.
Pros:
- Lower tax rates than salary and fees
- No CPF contributions, reducing deductions
- Paid only when the company is profitable
Cons:
- Must be a shareholder to receive dividends
- Cannot be used as a guaranteed income source
- Company must be profitable to issue dividends
James liked the tax efficiency of dividends but worried about the lack of security. So, what’s the best approach?
The Best Strategy – A Balanced Approach
Many directors use a mix of salary, director’s fees, and dividends to balance stability and tax efficiency.
A Smart Strategy:
- Take a small salary for financial security and CPF benefits.
- Use director’s fees for additional compensation.
- Pay dividends when the company is profitable to reduce tax liability.
Director’s fees are payments made to directors for their services and responsibilities. Unlike a salary, they are not tied to a contract and must be approved by shareholders.
Pros:
- Tax-deductible for the company
- Can be taken as a lump sum rather than monthly
Cons:
- Subject to Income Tax
- Requires shareholder approval
James realised that director’s fees provided flexibility, but they were still taxed at standard rates. He wondered if dividends were a better option.
Key Factors to Consider
Before deciding on a payment structure, here are a few critical factors to evaluate:
- Company Profitability – If your company isn't profitable, dividends aren’t an option.
- Cash Flow Needs – Salaries and fees provide stability, while dividends depend on profit.
- Tax Implications – Consider how each option affects personal and corporate tax obligations.
- Retirement Planning – CPF contributions from a salary can help secure future benefits.
James realised that a balanced approach helped him manage both immediate income and long-term financial security.
Final Thoughts
There is no one-size-fits-all approach to director’s remuneration. The best strategy depends on personal financial needs, company profitability, and tax planning.
If you’re unsure how to structure your income, consulting an accountant can help you find the most tax-efficient and financially stable solution.
Need expert advice? Accounting Superhero can help you optimise your director’s income strategy. As a Xero Gold Champion Partner and Certified Advisor, Accounting Superhero provides expert guidance in tax-efficient planning. Get in touch today!
Sources:
1. Salary, bonus, director's fee, commission and others
2. Dividends
3. Compensation Planning for Small Business Owners in Singapore