Setting up a limited company gives you greater flexibility over your personal income, specifically how and when you pay yourself. This enables you to take money from the company in the most tax-efficient way, by taking a director’s salary through PAYE and drawing shareholder dividends when company profits allow
Directors’ loans, business expenses, and various tax allowances and reliefs are also available. All of these things can contribute towards an overall ‘package’ of tax-efficient remuneration and benefits.
To help you establish the best income structure, we explain the options available and the various taxes you will need to pay. However, you should consult an experienced accountant for professional advice tailored to your needs. This will ensure the best outcome for both you and your company.
Key Takeaways
- Limited company owners can pay themselves in various ways, including a director’s salary, dividends from shares, reimbursement of expenses, and a director’s loan.
- If your company makes a profit, the most tax-efficient way to pay yourself is to take a small director’s salary topped up with dividends.
- Combining salary with dividend income can help minimise your Income Tax, employee National Insurance contributions (NIC), Corporation Tax, and employer NIC liabilities.
How to pay yourself through a UK limited company
If you are a director and shareholder of a UK limited company, there are four different ways you can take money out of your business for personal use:
- Director’s salary
- Dividend payments
- Director’s loan
- Reimbursement of allowable expenses
Most company owners take a salary and dividends while also claiming legitimate business-related expenses. Director’s loans are not as common but are used in certain situations.
Let’s look at each of these remuneration methods in more detail, starting with the different taxes that apply to them.
Paying tax on a director’s salary
If you take a director’s salary, this income will be taxed ‘at source’ through HMRC’s Pay As You Earn (PAYE) system – the same way regular employees are taxed on their wages. You will do this by operating PAYE as part of your company payroll.
Income Tax and National Insurance contributions (NICs) are deducted from your salary through payroll and paid directly to HMRC.
Wages are a tax-deductible business expense, so your company will not pay Corporation Tax on the amount you receive as a director’s salary. Corporation Tax only applies to profits – i.e., the money left over after you’ve accounted for all business overheads and other expenses.
However, if your salary is over a certain amount, your company will be liable to pay employer’s (secondary) Class 1 National Insurance contributions.
Income Tax
Assuming you’re entitled to the standard tax-free Personal Allowance of £12,570, you will pay the following rates of Income Tax on your director’s salary:
- 20% (Basic rate) – £12,571* to £50,270
- 40% (Higher rate) – £50,271 to £125,140
- 45% (Additional rate) – over £125,140
*If your adjusted net income is more than £100,000, your Personal Allowance will decrease by £1 for every £2 earned above that figure. This means that your Personal Allowance will be zero if your annual income is £125,140 or more.
You can view current and previous Income Tax rates and Personal Allowances online.
If you live in Scotland, you will pay Scottish Income Tax instead. The rates and thresholds differ slightly from those outlined above, but the Personal Allowance is the same.
National Insurance contributions (NICs)
In addition to Income Tax, employees (including directors) and their employers must make Class 1 National Insurance contributions on earnings above certain thresholds.
On your director’s salary, you will pay 8% employee NICs on earnings above £12,570 per year (NIC primary threshold) up to £50,270 per year (NIC upper earnings limit). On income above the upper earnings limit, you will pay a reduced rate of 2%.
Your company will also be liable to pay 15% employer (secondary) National Insurance contributions on your salary income above £5,000 per year (NIC secondary threshold).
You can view current and previous NIC rates and thresholds for employees and employers online. The same rates and thresholds apply to all UK taxpayers, including those who live in Scotland.
Paying tax on dividends
Directors who are also shareholders usually take dividend payments on top of their salary income. Dividends are not liable to Income Tax or National Insurance contributions. However, the amount of tax you pay on your dividend income depends on your Income Tax band.
The dividend tax rates for 2025-26 are as follows:
- 8.75% (basic rate) – annual earnings up to £50,270
- 33.75% (higher rate) – annual earnings between £50,271 and £125,140
- 39.35% (additional rate) – annual earnings over £125,140
To work out which tax band you fall into, you need to add your total dividend income for the year to your director’s salary and any other income you receive. Your combined earnings for the year will determine which tax rate(s) you’ll pay on your dividend income.
There is an annual dividend allowance of £500 for the 2025-26 tax year. This means that the first £500 of dividends are tax-free. You also won’t pay tax on any dividend income that falls within your Personal Allowance.
Dividends are not paid or taxed through PAYE. Instead, you are personally responsible for reporting and paying tax on your dividend income through Self Assessment.
Moreover, dividends are not a business expense, so you cannot deduct these payments from your company’s Corporation Tax bill. This is because companies pay dividends out of profit after tax – i.e. the company’s net profit after deducting Corporation Tax and other expenses from its income. This is why dividend tax rates are lower than Income Tax rates.
If you are a Scottish taxpayer, the dividend rates and thresholds listed above also apply to you. More information about tax on dividends is available from HMRC online.
Tax on directors’ loans
A director’s loan is any money you take from your company for personal use that is not one of the following:
- Director’s salary
- Dividends
- Reimbursement of expenses
- Reimbursement of money you’ve previously paid into or loaned to the company
If you borrow money from your company or lend money to the company, you must record the payments and repayments in a ‘director’s loan account’.
A director’s loan provides an opportunity for tax-free borrowing over the short term. However, tax may be payable if your loan account is overdrawn (i.e. you owe money to the company) after the end of the company’s financial year. This tax is known as ‘section 455’ or ‘S455’ tax.
Section 455 tax is a form of Corporation Tax, which must be reported on a Company Tax Return. If a director’s loan is not repaid in full within 9 months of the company’s year-end, S455 tax is charged at a rate of 33.75% of the outstanding loan balance.
However, companies can reclaim this tax when the director’s loan is fully repaid. Therefore, S455 is essentially a holding tax.
If you take a director’s loan of more than £10,000, HMRC will treat it as a ‘benefit in kind’. If the company does not charge you interest on the loan, or it charges less than the official rate, HMRC will charge the official rate of interest to calculate the benefit in kind.
The official rate of interest for 2025-26 is 3.75%. Therefore, if a loan of £10,000 was outstanding for 12 months, the interest charge would amount to £375.
Tax on expenses and benefits
Expenses and benefits can be particularly complex because they are all reported and taxed differently.
Some expenses that companies pay to directors are tax-free, such as mileage, business travel, business entertainment, and work tools. Provided that the company reimburses the director’s actual costs or an HMRC-approved flat rate, there is no tax liability on those expenses.
However, companies must report and pay Income Tax and NIC on other types of expenses and benefits, either through payroll or by filing form P11D at the end of the tax year. Examples include company cars, health insurance, and homeworking costs (including computers, furniture, phone, broadband, supplies, and utilities).
Some directors report and claim tax relief on their business-related expenses through Self Assessment rather than claiming reimbursement from the company.
Detailed guidance on expenses and employee benefits is available from HMRC.
What’s the most tax-efficient way to pay myself from a limited company?
If you are a director and shareholder, the most tax-efficient way to pay yourself from your limited company is to take a small salary through PAYE topped up with dividends from shares (if your company has profits available to distribute as dividends).
You can achieve further efficiencies by claiming expenses, taking advantage of various allowances and tax reliefs, and using a director’s loan where necessary.
The most tax-efficient method of remuneration for company owners depends on their specific circumstances and the tax rates and thresholds for the year, but the basic approach can be found below.
Step 1 – Director’s salary
Companies with employees or multiple directors
If your company has at least one employee (who is not a director) or two directors earning above the NIC secondary threshold, the best option is to take an annual salary of £12,570 (the limit of your tax-free Personal Allowance) and claim Employment Allowance to reduce the company’s NIC liability (more on this later).
You won’t pay any Income Tax on this amount unless you have other sources of taxable income from outside the company (e.g. wages from another job). Moreover, this will lower the company’s taxable profits and Corporation Tax bill.
You won’t pay any Class 1 employee NICs because the salary does not exceed the NIC primary threshold. While the company will be liable to pay Class 1 employer NICs on your salary income above £5,000, the Employment Allowance will cover some or all of this.
Companies with a sole director and no other employees
If you are the sole director of your company and do not employ anyone else, you cannot claim Employment Allowance. Therefore, the most tax-efficient approach is to take an annual salary up to the secondary threshold of £5,000 per year. By doing so, you will avoid employee and employer NICs altogether.
Alternatively, you can pay yourself an annual salary up to the NIC primary threshold of £12,570, as in the previous example. However, this is less tax-efficient because the company won’t be eligible for the Employment Allowance to cover its employer NIC liability.
Pay yourself a high enough salary to qualify for the State Pension
To receive the full State Pension on retirement, you need a total of 35 qualifying years of National Insurance contributions or credits.
You will get a qualifying year if your director’s salary is at least £6,500 per year. This is the NIC lower earnings limit (LEL), which is the minimum amount you need to earn in a year through PAYE to qualify for state benefits, including the State Pension.
You can choose to make voluntary contributions, but it’s easier and more cost-efficient to keep your NICs up to date by making regular payments through PAYE.
Step 2 – Dividend payments
Most company owners take the majority of their earnings as dividend payments because:
- The first £500 of dividend income is tax-free
- Dividend tax rates are lower than Income Tax rates
- You don’t pay NICs on dividends
Beyond the tax-free dividend allowance of £500, you can pay yourself any amount of dividends, provided that the company has available profit to distribute after accounting for Corporation Tax (if the company doesn’t make a profit, you can’t take dividends).
However, rather than removing all available profit from the company, you may wish to consider leaving some of the profit in the business as distributable reserves. These can be withdrawn as dividends in a future tax year, potentially at a lower dividend tax rate depending on the circumstances specific to that tax year.
- Most tax-efficient director’s salary and dividends for 2025-26
- New tax year 2025-26: key changes for businesses
- 13 changes to UK company law – from 4 March 2024
Moreover, the company should retain sufficient profits as working capital to ensure it can meet all future liabilities as they fall due. It may also be worth reinvesting some of the profit to grow the business.
While companies cannot claim dividends as a business expense (unlike salaries), the total Corporation Tax and dividend tax liability on this money is usually lower than the combined Income Tax and NIC rates applicable to salary income.
What should I set my directors’ salary as?
There is no right or wrong amount. The most tax-efficient and appropriate director’s salary depends on various factors, including whether:
- Your company is eligible to claim the Employment Allowance
- You have income from other sources outside the company, such as wages from another job or self-employment, income from property, or taxable gains (profit) from the disposal of assets
- You want to protect your entitlement to state benefits
- A higher salary is required for a mortgage, personal loan, or some form of insurance (e.g. income protection, critical illness cover, or life insurance)
It also depends on whether your company has available profits to distribute as dividends. If it doesn’t, you’re still entitled to a salary, so you may need to set it higher to ensure you earn enough to cover your personal expenses.
Should you take a lower salary?
Again, it’s entirely up to you. Whether or not to take a lower director’s salary depends on your particular circumstances and requirements, as discussed above.
But remember, while salaries are tax-deductible and will lower your company’s Corporation Tax liability, taking a small salary topped up with dividends will still be more tax-efficient than taking all or most of your income as a salary.
The best thing to do is to speak to an accountant or financial advisor for expert guidance.
Step 3 – Expenses and benefits, directors’ loans, pensions, etc
Expenses, benefits, and tax reliefs
Some company owners make substantial use of expenses and benefits on top of their salary and dividend income.
The allowable expenses and benefits that you can claim through your company include:
- Pension contributions and retirement benefits schemes
- Computers and office equipment
- Training costs
- Professional membership fees and subscriptions
- Company cars
- Fuel expenses (mileage allowances) and parking charges
- Professional services, e.g. accountancy fees
- Medical insurance
- Travel expenses, meals, and entertainment costs
- Working from home expenses
- Some forms of insurance
Directors often claim many of these business-related expenses (those which are “wholly and exclusively” for business purposes) directly from their companies, if they pay for them using personal funds. As we explained earlier in the post, companies may have to pay tax and NICs on many of the expenses and benefits they provide to directors.
You can also claim tax relief on business-related expenses through Self Assessment instead, by deducting them from the total taxable income you report on your annual Self Assessment tax return.
As a director and shareholder, you’ll need to file one of these tax returns each year with HMRC if you receive dividends or any other type of income that is not reported and taxed through PAYE.
You may be able to claim tax reliefs on your personal income if you:
- Pay into a private pension
- Spend your own money on certain things that you need to buy for your job, but do not claim as expenses from the company (as previously mentioned)
- Donate to charity
- Make maintenance payments to an ex-spouse or ex-civil partner
Some tax reliefs can be applied automatically through PAYE, but you will need to apply for others when you file your Self Assessment tax return with HMRC.
There are different taxation and reporting rules depending on the type of expense or benefit you are claiming. GOV.UK provides an A to Z of business expenses and benefits, along with information on the relevant tax rules and rates that apply.
Directors’ loans
A company director can make use of business funds for a limited time through a director’s loan. However, as we discussed earlier, if loans are not repaid within a certain amount of time, tax will apply.
Furthermore, you cannot keep making the same loan to yourself repeatedly, i.e. paying it back before the tax-free deadline and then immediately taking another loan. HMRC is wise to this strategy. It is known as ‘bed and breakfasting’ and will attract tax.
Pensions
One of the most tax-efficient ways to extract profits from a company is to put funds into a pension. Making director pension contributions helps minimise Corporation Tax, Income Tax, and NIC liabilities – provided such payments fall within the annual allowance for tax-free pension contributions. This is currently £60,000 in the 2025-26 tax year.
Moreover, if you take money out of your pension pot (when this is permitted – usually not before the age of 55), 25% of any amount that you take will be tax-free.
Employment Allowance
The Employment Allowance is a scheme that allows certain employers to reduce their secondary NIC liability by up to £10,500 each tax year. You can usually claim this allowance if the company has at least one employee (who is not a director) or two or more directors paid above the NIC secondary threshold.
In other words, you cannot claim Employment Allowance if you are the sole director and do not employ anyone else to work in your company.
In terms of tax efficiency, this means that sole directors with no other employees may want to consider taking a salary of no more than the NIC primary or secondary thresholds (i.e. before NIC liability kicks in).
So there you have it…
We have discussed the most tax-efficient way to take money from a limited company. Typically, the best option is to take a low salary, top up your income with dividends, and make use of all available expenses, allowances, and tax reliefs.
It should be stressed that this post shows the optimal strategy from a tax point of view, but this needs to be tempered with practicality. That is, how much you need to take out of your company to cover your cost of living, how much you feel your hard work is worth, and whether you need to retain money in the company to sustain or grow the business.
Regardless of what you decide to pay yourself, we recommend taking professional, tailored advice from an accountant or specialist tax advisor. Expenses, benefits, and tax reliefs are notoriously complex, so it’s worthwhile having an expert on hand to guarantee the most tax-efficient outcome.
Please comment below if you have any questions or need help forming a company. You can also explore the 1st Formations Blog for more limited company guidance and small business advice.
Please note that the information provided in this article is for general informational purposes only and does not constitute legal, tax, or professional advice. While our aim is that the content is accurate and up to date, it should not be relied upon as a substitute for tailored advice from qualified professionals. We strongly recommend that you seek independent legal and tax advice specific to your circumstances before acting on any information contained in this article. We accept no responsibility or liability for any loss or damage that may result from your reliance on the information provided in this article. Use of the information contained in this article is entirely at your own risk.
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Comments (34)
Doesn’t help if the company profits are £150k with the jump in CT rate to 25% (less tax relief). What’s the most tax efficient way to pay a directors salary then?
Thank you for your kind comment.
Unfortunately as we are not regulated to provide accountancy advice, we are unable to provide advice on specific scenarios. We would recommend contacting an accountant for further assistance.
Please accept our apologies for any inconvenience caused.
Kind regards,
The 1st Formations Team
Thanks for the article! These tax payment tips will be helpful for my small business accounting UK company.
Fantastic to hear David! We’re always looking for ways to support small businesses like yours.
Kind regards,
The 1st Formations Team
From the Example 1, I do not understand from which amount (business profits) is the 19% deducted to come to £8,843.
Assuming the Business profit equals the income £50,270. I guess
– The first £12,570 are considered business expenses
– NIC is £479
– £37,700 is now taxable at 19% = £7,163
– Since dividends are distributed from post-tax business profits, basic rate dividend tax of 8.75% on £30,537 which is £2,672
Total Deductions: £479 + £7,163 + £2,672 = (employer’s NIC, Corporation Tax and dividend tax).
So Total net earning £39,956
If this is not accurate I would be more than happy to understand where the corporation tax are calculated from
Hi Alban,
Thank you for your comment. On review there was an error in calculation within our post which we have now amended.
Your method generally is correct, however the NIC of £479 is also an allowable expense and therefore, for corporation tax purposes, £37,221 is taxable at 19% which gives corporation tax of £7,072.
Further, the dividend tax of 8.75% would not apply to the first £500 of dividends as this is within the nil-rate band.
Therefore the final outcome would be:
Profits subject to corporation tax = original profits – salary taken – employers NIC = (£50,270 – £12,570 – £479) = £37,221
Less corporation tax of £7,072 = cash available for extraction by dividend = £30,149
£30,149 less £500 nil-rate band = taxable dividend (£29,649)
Dividend tax @ 8.75% on £29,649 = £2,594
Net dividend post tax = £500 + £29,649 – £2,594 = £27,555
Cash extracted and retained by business owner = salary + net dividend post tax = £12,570 + £27,555 = £40,125
Total taxes paid = corporation tax + employers NIC + dividend tax = £7,072 + £479 + £2,594 = £10,145
Kind regards,
The 1st Formations Team
Hi John,
I’m a Director of my company and have a negative balance directors loan account. I can see how beneficial the salary/dividend structure of paying myself can be, benefiting myself and my company.
My question is, if I decide to pay myself through salary/dividends would this affect my loan account or can it be kept completely separate ?
Regards
Hi Michael,
Thank you for your comment. Your directors loan account would only be impacted if the amounts physically paid in cash differed to the amounts processed through the payroll or as a dividend. As an example, if processing a salary created a net payment due to you of £3,000, but the cash wasn’t physically paid, the £3,000 would be marked as owed to you in the directors loan account. Or if you paid £2,000, then the underpayment of £1,000 would be marked as owed to you in the directors loan account.
Ordinarily though, cash payments would match the net amount per the salary or dividends, so the directors loan account would remain unaffected.
Kind regards,
John
Hello,
I have irregular work. I work as a machine fitter for my son who runs his own company. I am a retired police officer and my pension takes all of my personal allowance. My wife has her own self assessment as we are also foster carers therefore her personal allowance is taken up by that and therefore she will not be a director taking any salary. I am up to £10,000 in income from my work and I need to set up to pay income tax. I think setting up as a ltd company would be the way forward in case I do get any other work to add to it. I have a dormant Home Improvement company registered at companies house. I am right in saying that I could take any income as
salary, taking it off corporation tax and then take off any expenses before I submit my tax assessment. Is this the right thing to do or work as a sole traderMany thanks
Thank you for your kind enquiry, Martin.
One of the main reasons for pushing income through a limited company is to pay yourself dividends as opposed to salary, as this would lead to a slightly low rate of tax in most instances. In addition, you are likely to be able to qualify for more tax-deductibles than working as a sole trader.
However, you should factor in that the director of a trading limited company, you will be responsible for ensuring the company files an annual confirmation statement, and an annual return. The annual return is normally done by an accountant, and accountants charge between £750 and £1500 for filing the annual return for a small one person limited company. You would have to factor this into your cost-calculations. On the face of it, staying a sole trader may therefore be the best way to go in this instance.
We trust this information is of use to you.
Kind regards,
The 1st Formations Team
Hi John,
Great article, very informative!
I was wondering if you could help me with a relatively simple Q I hope.
I’m non-resident currently, domiciled in a country with double taxation agreements with the UK (incidentally, no income tax to pay in the country that I reside in currently). I plan on starting a Limited Company in the UK, be the sole director, for a short term 3-6 month contract opportunity. Considering I’m non-resident, would I be able to declare the majority/all of the income generated as salary without paying any tax as I’d be eligible for the NT tax code for non-residents?
P.S. I’m currently on an NT tax code that HMRC had already issued when I became permanently non-resident, hence my logic above?
Thanks in advance!
Thanks for the kind feedback!
Unfortunately, we can’t advise on this as it’s a very specific case, sorry about that.
Please do let us know if we can help with any questions you may have about your limited company formation.
Regards,
The 1st Formations Team
Hi, I have a pension question as I want to contribute to my pension from my limited company (I’m the sole director) this year. I have some limited earnings from my limited company in this tax period (which I would not exceed in my pension contribution) as I’ve been since July contracted under an umbrella company, which is also providing me with their own pension (I cover all pension costs with them employee and employer). How do I calculate my qualifying earnings for my personal contribution from my limited company (as an employer)? Does only my earnings from my limited company account or all annual qualifying earnings (including the gross from the umbrella company?) and how do I account for the pension contribution made to the umbrella’s pension? I would not exceed my global annual earnings with contributions made through umbrella or though limited or even with the sum of both.
Thanks for your kind enquiry, Maria.
Unfortunately this is beyond our experience level and we would not like to provide you within incorrect advise. We recommend you seek the advice of a professional pension adviser or accountant.
Please accept our apologies that we cannot be of more help in this instance.
Regards,
The 1st Formations Team
Hi John,
Thanks for writing this article, it’s been a really useful read.
I have a question in relation to this article and my businesses.
I run 3 limited companies have a 19yr old son (at uni) and a wife who is employed (outside of my 3 companies) on a basic of £42k+pension. I have no pension set up.
Company 1 is not active at the moment but has had transactions this year (BBL, expenses and payments out to Company 2). Company 2 has been very quiet but again some sales/costs. Company 2 paid money into Company 3. Company 3 has been very active and has performed reasonably well.
Would you recommend I allocate shares to Company 1+2 for their payments out (to company 2 and 3), as opposed to showing this as a loan?
Secondly, to make income more tax efficient, should I appoint either my son or wife as a director or make them a shareholder?
Lastly, as I am 45, is it possible to claim from a pension, if I paid money in via the company? I note that you point about being 55.
Thanks
Thank you for your kind enquiry, Ollie.
On the face of it, I’m afraid your questions principally concern tax and accounting matters, which we are unfortunately unable to provide advice on. This includes your question on whether it would be preferable to issue shares to companies 1 and 2 to companies 2 and 3 for their payments versus through a loan, as well as your question on if you are able to claim from a pension if you paid money via the company.
With regards to your question as to whether you should bring your son and wife in as director or shareholder – this is again a matter which would usually be determined on a case-by-case basis (for example, accounting for the age of your son). The position of a shareholder and director is fundamentally different, and this is reflected in how they might “receive” money – directors may be paid a salary or they may take out a director loan, whilst shareholders would instead be looking to receive dividends. Each of these would be subject to their own tax implications. This would again be something best answered by an accountant.
I am sorry we could not be of more assistance.
Regards,
The 1st Formations Team
Hello,
I have one question regarding paying myself a salary as an only Ltd company director. I recently created my business and now I’m going to start working freelance. I’m wondering about the time I might not have any jobs. If I’m registered for PAYE can I skip the month when I don’t have any income and not pay myself a salary? Do I still have to send a payroll but maybe with 0? Thank you for the help!
Kind regards,
Aleksandra
Thank you for your kind enquiry Aleksandra.
If you are registered for PAYE but no employees are paid in a given month, you must submit an Employer Payment Summary as opposed to a Full Payment Submission to HMRC. You can find out more information regarding an Employer Payment Summary and the deadline for filing them one here: https://www.gov.uk/running-payroll/reporting-to-hmrc-eps
We trust this information is useful to you.
Regards,
The 1st Formations Team
Hi, I am confused as to how much salary payment (and then dividends for the remainder) I need to make to myself to fully utilise the £12,570 tax free allowance. I have a limited company with myself and my wife as directors. I could pay both of us wages (she earns a PAYE salary of £21k in the education sector) but I only started earning/working through the company on a 3-month IT contract in July-September for this tax year (nothing from April to July 2021, nothing after September 2021 so far).
I haven’t paid myself a salary at all so far – the income earned is just sitting in my company bank account. I would like to pay myself an appropriate salary so that I fully utilise the £12,570 tax-free allowance by April 2022 (I might not earn any more income through the company this tax year if I don’t find another IT contract).
What do you suggest? Do you need any more information from me?
Thank you for your message, Colin.
In general terms, we do not presently have enough information to make a determination as to the best tax mix for your situation. Do you have a rough estimate on how money you would want to take out of the business by April 2022?
Regards,
The 1st Formations Team
Hello,
hope you’re doing well
I am non UK resident, have own company in UK and also in my country NON EU.
It will be ok, if – I will invoice my own UK company, from my own company in my country?
Thanks in advance!!!
Thank you for your kind enquiry, Sergiu.
It is possible to invoice two companies from different addresses even if the directors/shareholders are the same for both companies – if one is based in the UK and one is based outside of the EU.
We trust this information is of use to you.
Regards,
The 1st Formations Team
Hi, I have a Ltd company and a Part time job. What is the most tax efficient way to take money from my company.
Solely Dividends or still a combination of salary and dividends?
Thanks
Hi Jade
Thank you for your kind question. With regards to your question, it is difficult to comment on individual cases as we do not have all the details and we are not qualified to give tax advice. I would highly recommend you seek the advice of an accountant in this instance.
However, in theory, the fact that you have 2 sources of income should not make any difference to the general principles outlined in the blog. I would suggest your total salary should still be up to the relevant Threshold – dependent on your circumstances, and the remainder should be taken in dividends.
Kind regards,
The 1st Formations Team
If I’m a contractor operating through a LTD (sole director) and I’m taking in £4000 per month into the business. Could I pay myself say £3000 pounds per month regularly and then declare a certain percentage as salary and dividend at the end of the year?
I’m in a position when the money into the business will be very regular so would ideally like to pay myself regularly rather than paying myself the PAYE earnings every month then taking a dividend at the end of the year.
Thank you for your kind enquiry, James.
In general terms, there is no way of backdating a declaration of a payment of a salary per month, as if you pay a salary you must pay this via PAYE and deduct (and pay) both employee and employer National Insurance contributions and employee Income Tax at source prior to the salary being paid each month (to turn a gross salary into a net salary).
We would recommend speaking to an accountant, as this is a complex area; however, in general terms you will need to make a decision of this nature at the start of the period rather than at the end.
I trust this information is of use to you.
Regards,
The 1st Formations Team
If someone makes a profit of 100k and wants to take that out of the business in the most tax efficient way , how can they do that in a limited company
Thank you for your kind enquiry, Mo.
If the company has only one employee and one shareholder (i.e. you), the most tax efficient way of extracting the £100k is to pay yourself a salary of £9,500, and declare the rest as dividends to yourself. This is because you will pay more tax should you take any salary above £9,500.
I trust this information is of use to you.
Regards,
John
Just a question, so if im paying myself £9500 a year on PAYE and i wasn’t to spend this money i leave in business for reinvesting i still can avoid tax? Also allowable business expenses such as restaurants and travel expenses is this how the rich live luxury? Writing these off as expenses and not paying tax? Do i get this money back or do i just not get charged tax on it
Thank you for your kind enquiry, Jordan.
If you pay yourself via PAYE, the money will leave your business bank account and be transferred to a personal bank account. At this time you could no longer leave the money in the business for reinvesting. You would need to not pay yourself from PAYE in order to reinvest it in the business without paying tax.
With regards to business expenses such as restaurant and travel, it should be noted that this just reduces the tax liability of people claiming these expenses, it does not mean that they get free meals and travel or that the money will be returned. It should also be noted that restaurant expenses are monitored heavily and are not generally open to abuse due to low claiming limits.
I trust this information is of use to you.
Regards,
John
Great article, thanks!
What’s the reason for only taking £9.5K salary rather than £12.5K?
Assuming you’ll be taking all £2k allowance of tax free dividends in both cases, wouldn’t the extra 3K salary payment (subject to 12% NIC) be better than taking 3k extra in dividends subject to Corporate (19%) and Dividend (7.5%) tax?
Thank you for your kind enquiry, Ben.
In answer to your question, please note that taking the extra £3,000 as salary would be subject to not only employee National Insurance Contributions, but also employer National Insurance Contributions of 13.8%. This is why it is more tax-efficient to only take £9,500 as salary as opposed to £12,500, as your overall exposure to National Insurance Contributions will lead to more tax being paid overall than if you took £3k extra in dividends.
I trust this information is of use to you.
Regards,
John
Hello
Im researching about ltd company by shares.i want to pay as little corporation tax as possible.i work as a support worker and i earn around £30.000 per year.can i just pay myself the salary out of my business account and declare it as a deductable business expences?!leaving the account empty?!and habe non profitable ltd?!
Also what about NICs?
Thank you very much,your article gave me a lots of light into all the mess!!!!!
Thank you for your kind enquiry, Radka.
As salaries are deemed as a cost prior to declaring the profit required to be taxed by Corporation Tax in a limited company by shares, you are able to pay yourself the full profit as a salary if you wish (however, you would have to be able to accurately predict your profit in advance to achieve this). You should bear in mind that employees paid a salary (in this instance you) would be taxed for income tax, and employee’s national insurance contibutions. You would also need to pay 13.8% for employers national insurance contributions on the same salary.
It may be wiser for you to consider issuing a dividend for the profits instead of taking them as a salary, for tax efficiency purposes.
We would recommend given the importance of this decision, that you seek professional advice from an accountant before proceeding.
I trust this information is of use to you.
Regards,
John