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An important and exciting aspect of being a director of a limited company is getting paid. As a limited company, this can be very tax-efficient once you’re in profit.

 

Whilst you should always seek professional advice from an accountant when it comes to paying yourself, we’ll outline the two main ways you can be paid from your limited company.

 

Paying yourself a salary

 

A Salary is counted as an allowable expense. This means that you don’t have to pay the 19% corporation tax on it. You also get a personal tax allowance of £12,570 in the tax year 2021/2022, which means that you won’t pay tax on income up to this allowance limit.

 

You also need to consider National Insurance thresholds. The National Insurance Primary threshold is £9,568 per year for 2021/22, which means if your salary is under this threshold, you won’t pay employee National Insurance.

 

The secondary National Insurance threshold is £8,840 per year for 2021/22, this means that if your salary is under this threshold, your limited company won’t need to pay employers National Insurance contributions on your employee’s (you) earnings.

 

It’s worth noting that if your salary is below the Lower Earnings Limit, which for 2021/22 is £6,240, you won’t retain your State Pension contribution record, which we’ll discuss more in Being a director of a limited company blog series: Part 8 – Contributing to your pension.

 

If you choose to pay yourself with a salary, you need to register for PAYE before your first payday, but no more than 2 months before, which you can do here.

 

If you pay yourself a salary, remember you will need to issue yourself a P60 form, as well as any employees that you pay a salary to.

 

Whilst you can keep your salary low to avoid paying tax, there are some reasons why you might want to take a higher salary.

 

To qualify for maternity leave benefits, you need to comply with the national minimum wage regulations, which varies depending on your age. You can find out more about the National Minimum wage on the government’s website here.

 

Paying yourself a low salary can also affect things like loan and mortgage applications as you may need to meet specific criteria to get approved for these. Not to mention if you pay yourself under the National Insurance thresholds, and you have no other income, you won’t be using your personal tax allowance to the maximum.

 

Paying yourself dividends

 

If your company is in profit after any outgoings like tax, expenses, and liabilities etc. directors can be paid in dividends, rather than the profits be reinvested in the company. It’s illegal to pay dividends if your company doesn’t have sufficient profits to pay the amount.

 

When paying dividends, there are certain rules that must be followed, such as, there needs to be held a meeting of directors to declare the dividend, and minutes and records need to be made and kept of this meeting, even if you’re the only director.

 

When a dividend is paid you also need to issue a dividend voucher. A dividend voucher shows the date it’s paid, the company’s name, the shareholder’s (you) name and the amount that’s being paid.

 

Dividends can be a tax-efficient way to pay yourself due to lower personal tax paid on them, and since dividends come from the company’s after-tax profit, the company doesn’t pay tax on dividends payments to directors. There are also no National Insurance payments to be paid by either the company or the director.

 

The amount of tax paid by the recipient of the dividend depends on their tax band, which are as follows for 2021/22:

 

  • Basic rate (£0 – £37,000) = 7.5%
  • Higher rate (£37,701 – £150,000) = 32.5%
  • Upper rate (£150,001+) = 38.1%

 

When you compare the percentages to Income tax rates (which you would pay if you’re a sole trader or take a salary), dividend tax rates are much lower:

 

  • Basic rate (£0 – £37,000) = 20%
  • Higher rate (£37,701 – £150,000) = 40%
  • Upper rate (£150,001+) = 45%

 

There is also a separate tax-free allowance for dividends. Currently (2021/22) the tax-free allowance on dividends is £2,000 a year, which means you can receive up to £2,000 in dividend payments without paying any personal tax.

 

When considering the information above about both salaries and dividends, the best way to pay yourself as a director of a limited company depends on different factors.

 

If you’re looking to apply for a mortgage or a large personal loan in the near, it might be worth considering taking a higher salary as there are normally certain requirements that have to be met.

 

If you’re looking to pay yourself in the most tax-efficient way possible, it might be worth considering taking a combination of a small salary and dividends.

 

To pay yourself the most tax-efficient way, your salary would have to be under the National Insurance thresholds, but above the Lower Earnings Limit (£8,840) so you won’t pay National Insurance as an employee or an employer, but still retain your state pension record. You’d then pay yourself the remainder of what you need in Dividends.

 

By doing this you could avoid paying national insurance and keep personal tax to a minimum due to only paying tax on dividends, which is lower than income tax, but will get less tax relief when contributing to your pension.

 

Please note, when it comes to paying yourself, you will need to seek professional assistance from an accountant to make sure that how you’re paying yourself is suitable for your situation and that you’re doing so legally.

 

Now that you have an idea of how to pay yourself as a limited company director and you’re ready to start your limited company, click here to take the first step and make sure your company name is available to register

 

The most tax-efficient way to pay yourself as a limited company director

 

When considering the information above about both salaries and dividends, the best way to pay yourself as a director of a limited company depends on different factors.

 

If you’re looking to apply for a mortgage or a large personal loan in the near, it might be worth considering taking a higher salary as there are normally certain requirements that have to be met.

 

If you’re looking to pay yourself in the most tax-efficient way possible, it might be worth considering taking a combination of a small salary and dividends.

 

To pay yourself the most tax-efficient way, your salary would have to be under the National Insurance thresholds, but above the Lower Earnings Limit (£8,840) so you won’t pay National Insurance as an employee or an employer, but still retain your state pension record. You’d then pay yourself the remainder of what you need in Dividends.

 

By doing this you could avoid paying national insurance and keep personal tax to a minimum due to only paying tax on dividends, which is lower than income tax, but will get less tax relief when contributing to your pension.

 

Please note, when it comes to paying yourself, you will need to seek professional assistance from an accountant to make sure that how you’re paying yourself is suitable for your situation and that you’re doing so legally and have all documents needed. If you’re one of our customers and are in need of an accountant, we can connect you with our expert accounting partner, ATN Partnership! Simply drop us an email at support@theformationscompany.com.

 

Now that you have an idea of how to pay yourself as a limited company director and you’re ready to start your limited company, click here to take the first step and make sure your company name is available to register.