One of the most common questions we get asked when we speak to clients who are considering starting a new business and trading as a Limited company is “how do I pay myself”.
The most tax efficient way for a company director to pay themselves is by a combination of salary and dividends.
Everyone has different circumstances and may have other income such as a rental property or pension income. This must be taken into account when we devise the best method for each person.
- The first thing we consider is to take advantage of your personal tax allowances. Not just the personal allowance for income tax but also the National Insurance (NI) bands.
- If a company has employees or multiple directors, we may also be able to take advantage of the NI employment allowance and then use all the directors annual personal tax band.
- In the situation where there is one director and no employees the best level of salary is normally equal to the NI Primary threshold.
- In most circumstances directors need more income than the NI Primary threshold so the rest of the money they require is taken from the company as a dividend.
- It is important to note that dividends can only be paid from retained profits.
- The first £2,000 of dividends are taxed at 0% and any dividend that uses up any remaining personal allowance are free from tax.
- The tax paid on the remaining dividends taken from the company are taxed at a far lower rate than salary processed through the PAYE scheme.
- It is always best to pay up to the higher rate tax threshold for that tax year and then consider other options for taking funds out of the business
It is also worth considering the Directors loan. This is something many clients who come to us from other accountants have not had explained to them in a simple and clear way.
- Directors can take advantage of borrowing money from the company through their director’s loan but there are strict rules on timing of the repayment of the loan and the taxes payable if the loan is not repaid can be high.
Another method for directors to extract excess money from the business is by making pension contributions. This also has the advantage of being a tax deductible expense so it also saves Corporation Tax.
The above is just a quick overview of the main things to consider when deciding how to pay yourself. It’s important to remember that what is the right method for one person may not work for someone else, so we always suggest speaking to us first to discuss in more detail.
We would be happy to meet with you for a chat so please book a call with Russell and see if he can help?
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