Child Maintenance for Limited Company Directors: Salary, Dividends and What the CMS Counts

Why limited company directors are treated differently

If you run your own limited company, the CMS cannot simply look at your salary. Many directors pay themselves a low salary - often around the National Insurance threshold - and take the rest of their income as dividends. Others leave profits in the company rather than drawing them down at all.

The CMS is aware of this. It has specific rules and powers to look beyond the salary figure and consider your total income from all sources. Getting this wrong can result in a much higher maintenance figure than you might expect - or a successful variation application by the receiving parent.

What income the CMS counts for directors

The CMS calculates your gross annual income by adding together:

• Director's salary - your PAYE salary from the company, including any bonuses
• Dividends - all dividends you receive from the company (and from any other shareholding)
• Any other taxable income - rental income, interest, employed income from any other job

Salary and dividends are both reported on your Self Assessment return. The CMS obtains this figure directly from HMRC. If you take a salary of £12,570 and dividends of £40,000, the CMS will work from a gross income figure that includes both.

How dividends are counted

Dividends are included in your gross income for CMS purposes. The CMS uses the gross dividend figure before the dividend tax allowance is applied. If you receive dividends from multiple shareholdings (not just your own company), all of them count.

The timing of dividends matters. If you declare a large dividend in one tax year and nothing the next, the CMS figure will reflect the year in which it was paid. This creates scope for income smoothing - but the CMS and receiving parent can challenge this through a variation if the pattern appears to be artificially arranged.

Retained profits: the variation route

This is the most significant issue for many director-shareholders. If your company makes a profit of £100,000 but you only draw £30,000 as salary and dividends, the CMS calculation will be based on £30,000. The remaining £70,000 sits in the company.

However, the receiving parent can apply for a variation on the grounds of unearned or investment income, or on the grounds that you have control over income that is not being drawn. The CMS will examine:

• Whether you control the company (typically more than 50% of shares)
• Whether the retained profit is genuinely needed for business purposes or is simply being held back
• Whether there is a pattern of drawing less income since the maintenance calculation began

If the CMS accepts the variation, it can calculate maintenance as if you had drawn more of the profit. This is sometimes called the "notional income" variation.

Director's loans

Taking money from your company as a director's loan rather than salary or dividends is not normally counted as income by the CMS. However:

• If the loan is not repaid and is subsequently written off by the company, it may be treated as income
• If the pattern of loans suggests they are being used as a substitute for salary to reduce maintenance, a variation may be applied
• HMRC has its own rules on director's loans (the section 455 tax charge) which may affect how the company accounts look

What happens at the annual review

The CMS reviews maintenance every 12 months. For directors, the review uses the most recent Self Assessment data available from HMRC. Because Self Assessment returns cover the previous tax year and are not due until 31 January, there can be a significant lag:

• A large dividend declared in April 2024 might not affect the CMS calculation until late 2025 or early 2026
• A year where you deliberately draw no dividends will reduce the next review figure - but may prompt a variation application

What the receiving parent can do

If the receiving parent believes the CMS calculation does not reflect the paying parent's true financial position, they can apply for a variation on several grounds:

• Assets: If the paying parent has significant assets (investment properties, substantial savings, company assets they benefit from personally)
• Diversion of income: If income that would otherwise be the paying parent's is being paid to a partner, family member or connected person
• Lifestyle inconsistent with declared income: If the paying parent's spending, property or lifestyle is inconsistent with the declared income figure
• Retained profits: As described above, if the company is profitable but the paying parent is drawing an artificially low income

Can I structure my company to reduce maintenance?

The CMS and courts take a dim view of arrangements that are clearly designed to reduce child maintenance. Deliberately restructuring your company, transferring shares to a new partner, or reducing drawings specifically to lower your CMS liability is something that:

• Can be challenged by the receiving parent through a variation
• Can result in the CMS applying a notional income figure regardless of what you actually draw
• May have tax consequences of its own if not done for genuine commercial reasons
• Reflects poorly if proceedings end up before a judge in associated family court matters

Getting proper legal and accountancy advice before making any changes to your company structure - especially after separation - is strongly recommended.

Using our calculator as a director

Our net pay calculator lets you enter your actual take-home pay - which for a director would be salary plus dividends actually received. It will estimate gross income from that figure and apply the CMS rates. This gives you a realistic starting point.

Bear in mind that if a variation is applied, the CMS may use a higher figure than your actual drawings. The calculator result is an estimate based on your stated income only.

Summary: key points for directors

• The CMS counts salary plus dividends from your Self Assessment return
• Retained profits are not automatically included but can be via a variation
• Director's loans are generally not income unless written off or used as a salary substitute
• The receiving parent can apply for a variation if your declared income does not reflect your real financial position
• Deliberate income suppression can be challenged and can have serious legal and financial consequences
• There is often a 12 to 18 month lag between earnings and the CMS figure - for better or worse