Running a garage or MOT centre as a limited company is a significant step up.
You’re no longer just fixing cars or managing bookings — you’re now a company director, responsible not only to customers, but also to HMRC, Companies House, and yourself.
One of the most important decisions you’ll make — often without clear guidance — is how to pay yourself:
- Salary?
- Dividends?
- A mix of both?
- Or simply “take money when it’s there and deal with it later”?
This article explains how director pay works for garage and MOT centre limited companies, where things commonly go wrong, and how to structure it properly so you avoid surprise tax bills, HMRC letters, or sleepless nights in January.
Why Director Pay Matters More Than Most Garage Owners Realise
Paying yourself is far from a minor admin task. How you pay yourself impacts:
- Your personal tax bill
- Your company’s cashflow
- Exposure to HMRC enquiries
- The risk of building up a director’s loan account
- Your ability to secure a mortgage or other finance
In garages and MOT centres, these risks are amplified because:
- Cashflow fluctuates from month to month
- VAT can quietly drain the bank
- Large costs for parts, equipment, and wages can arrive unexpectedly
- Directors often take money informally, as and when it’s needed
Without a clear plan, small decisions drift — and that’s where problems start.
Salary vs Dividends: The Basics (Without the Jargon)
Salary
A salary is:
- A fixed monthly payment
- Processed through payroll
- Subject to PAYE and National Insurance
- A deductible cost for the company
For most garage directors, a salary is set at a sensible level — not as the main source of income, but to provide consistency and legitimacy.
Dividends
Dividends are:
- Paid from company profits
- Not guaranteed
- Not a business expense
- Declared formally (not just transferred to your account)
Dividends are tax-efficient when used correctly. The problem arises when garage owners take dividends without checking profits or treat them like wages — a practice HMRC is quick to notice.
The Common Garage Director Scenario
We see this situation frequently:
- Money is taken out whenever the bank balance looks healthy
- Payments aren’t labelled clearly
- It’s unclear whether money is salary, dividends, or just a drawing
- The assumption is: “We’re busy, so we must be profitable”
Then January arrives:
- Unexpected personal tax bills
- Discovery of a director’s loan account
- Cash strain caused by VAT or payroll
- Stress levels spike
None of this happens overnight. It builds quietly throughout the year.
Why Garages & MOT Centres Are High-Risk for Director Pay Errors
1. VAT Confusion
VAT is not your money — but it sits in the bank. Many directors:
- Pay themselves using VAT funds
- Forget quarterly VAT drains cash later
- Don’t separate VAT from true profit
2. Lumpy Costs
Large, irregular costs hit garages hard:
- Parts
- Equipment
- MOT bay upgrades
- Staff overtime
If director pay isn’t planned, one large bill can destabilise everything.
3. “We’ll Sort It at Year End” Thinking
Year-end fixes cannot undo:
- Overdrawn director loans
- Illegal dividends
- Missed tax planning opportunities
By the time accounts are finalised, the damage is already done.
What a Sensible Director Pay Structure Looks Like
For most garage and MOT centre limited companies, a balanced approach works best.
Salary
- Low, tax-efficient level
- Paid monthly through payroll
- Provides National Insurance record
- Simplifies PAYE
Dividends
- Paid only when profits exist
- Declared properly and documented
- Scheduled to align with cashflow
- Treated as a reward, not a right
The Danger of Director’s Loan Accounts (DLAs)
If you take money that isn’t salary, dividends, or reimbursed expenses, it goes into a Director’s Loan Account — one of the most dangerous areas for garage directors.
DLAs can:
- Attract HMRC attention
- Trigger extra tax charges
- Highlight poor financial control
- Lead to penalties if left unpaid
Many directors aren’t aware they have one until it’s too late.
Illegal Dividends: A Silent Risk
Dividends can only be paid from retained profits, after all:
- Expenses are covered
- Corporation Tax is accounted for
- Adjustments are made
If profits aren’t available, a dividend is illegal, even if there is cash in the bank.
Illegal dividends can:
- Be reclassified
- Create personal tax issues
- Trigger HMRC scrutiny
This is one of the biggest hidden risks in garage limited companies.
Why Lenders Care
Director pay directly affects your ability to:
- Secure a mortgage
- Obtain car finance
- Access commercial lending
Lenders look for:
- Consistent salary
- Clear dividend history
- No messy director loans
- Transparent accounts
Random drawings or poor structure can cost opportunities down the line.
Tax Planning vs Tax Panic
The difference is simple: planning early.
Tax panic happens when:
- Numbers are reviewed only once a year
- There is no clear understanding of your position
- Decisions are reactive
Proper planning means:
- Knowing what you can safely take
- Understanding upcoming tax liabilities
- Avoiding nasty surprises
What a Good Accountant Should Do
A good accountant for garages and MOT centres will:
- Review director pay regularly
- Flag risks early
- Explain consequences clearly
- Prevent costly mistakes
- Balance tax efficiency with cashflow safety
They shouldn’t just process what’s already been done.
Final Thought: Director Pay is a Control Tool, Not Just a Tax Decision
Paying yourself correctly:
- Protects your business
- Protects you personally
- Reduces stress
- Builds long-term stability
Most garage owners don’t need aggressive tax schemes. They need clarity, structure, and control.
How Hammond & Co Helps Garage Directors
We work with garage and MOT centre limited companies to:
- Structure director pay properly
- Keep tax predictable
- Avoid HMRC issues
- Improve cash confidence
Director pay that makes sense — not surprises — always starts with a conversation.