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Not being able to pay a director’s salary is not that unusual. With seasonality, fluctuations in cash flow and unexpected expenses to deal with, there may be times when the company doesn’t have the funds to make the payment.
In that case, there might be other methods of remuneration you can consider, or you may choose to go without your salary for a few months for the benefit of the business. Alternatively, if the company cannot afford your salary and has other debts it cannot pay, you must contact a licensed Insolvency Practitioner.
Like any employee, most company directors take a regular monthly salary from their company as remuneration for their work. Their salary is subject to Income Tax and National Insurance Contributions.
Most directors pay themselves a low salary, usually up to £12,570 a year, to minimise their tax liability. They then supplement it with dividends. That means, in most cases, monthly salary payments are small, and directors may not necessarily rely on them financially.
If the company is struggling financially or its earnings are sporadic, you may choose not to take a salary for a month or two or longer. There are several ways to go about this. You could:
If you want to reduce your fixed costs, one option is to stop or reduce your salary payments. You can then use dividends to boost your remuneration when the company is more profitable.
You have to be very careful here, though. You can only pay dividends from company profits after all other expenses have been paid. If a company has no retained profits, it doesn't have any funds to distribute as dividends.
In these circumstances, paying yourself a dividend is legal and could lead to serious financial and legal consequences for the directors if the business subsequently fails. That includes becoming personally liable for company debts and a directorship ban.
Another option is to cut the business’s costs to free up cash flow to pay a director’s salary. There may be quick changes you can make to reduce non-essential spending, including:
In some cases, there may be alternative funding methods you can use to increase cash flow so you can take a salary. For example, invoice finance can free up the cash tied up in unpaid customer invoices. A merchant cash advance does a similar job for businesses that sell directly to consumers by giving you access to an upfront sum that you repay through future credit and debit card sales.
However, you must be careful with this approach. You cannot borrow money to pay a director’s salary if the company is not profitable or sustainable. Again, that could lead to personal liability issues and other consequences if the business fails.
If you cannot take a salary and the business has other debts it cannot pay, you must keep a close eye on its financial position. The risk is that the company is insolvent, at which point, you must cease trading and seek professional advice. If you continue trading when the company is insolvent and subsequently worsen the position of your creditors, you could face penalties.
If either of these is true of your business, you should consult a licensed Insolvency Practitioner immediately.
If your company is insolvent, an Insolvency Practitioner will assess your financial position and discuss your options. First, they will consider informal rescue methods, such as payment plans with creditors, cost-cutting measures and alternative funding. However, formal insolvency procedures will be more appropriate if you have multiple debts and are under severe pressure from your creditors or threatened with legal action.
A Company Voluntary Arrangement is a legally binding agreement that gives your company more time to pay its debts. You’ll be able to pay what you owe in monthly instalments over a typical period of three to five years.
That can free up cash flow to pay director salaries and fund the business’s operations. However, a CVA is only suitable for companies that are still viable and have a realistic prospect of returning to profitability.
Company Administration can provide much-needed breathing space if your debts are more serious. An Insolvency Practitioner will renegotiate with creditors to restructure company debts. It may be possible to pay director salaries during and after the Administration, although that will depend on the company’s financial situation and how the Administration ends.
Liquidation is likely to be in everyone’s best interests if your company has serious financial problems and no prospect of making a recovery. You can put the company into a Creditors’ Voluntary Liquidation (CVL) by appointing an Insolvency Practitioner.
They will sell the company’s assets and use the proceeds to repay the creditors as far as possible. You may also be eligible for director’s redundancy pay, which could compensate you for not being able to take a salary for the previous few months.
If your company can’t afford to pay directors and you’re worried about its financial position, you should contact our team immediately. We will assess your financial position, explain your options and guide you on the best route forward. Please get in touch for a free consultation or to arrange a meeting at your nearest office.
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If you are considering liquidation for your company, taking expert advice at an early stage is crucial. At UK Liquidators, our team of licensed insolvency practitioners are committed to providing limited company directors with the help and advice they need to make an informed decision.
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