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Running your own limited company provides greater flexibility over your personal income, specifically on how and when you pay yourself. This enables you to structure your own remuneration in a more tax-efficient way, by taking a director’s salary through PAYE and drawing shareholder dividends at regular intervals, or periodically when company profits allow.
Furthermore, directors’ loans and a variety of employee expenses are available, which can go towards an overall ‘package’ of benefits.
To help you establish the most tax-efficient remuneration structure, we will explain the different options available to you and discuss the various taxes that you will need to pay.
What taxes need to be paid through PAYE?
Salaried directors are taxed at source through HMRC’s Pay As You Earn (PAYE) system, just like any other employee. Income Tax and National Insurance Contributions (NIC) must be deducted through payroll, along with additional employer’s NIC, and paid directly to HMRC.
Wages are a deductible business expense, so your company will not pay Corporation Tax on your director’s salary. Corporation Tax is only charged on profits, i.e., the money that is left over after you’ve paid/accounted for business overheads and other expenses.
Income Tax
In the tax year from 6 April 2021 to 5 April 2022, the standard Personal Allowance (the annual income that an individual can earn tax-free) is £12,570. Income Tax is then applied at the following rates to earnings above that amount:
- 20% (Basic rate) – £12,571 to £50,270
- 40% (Higher rate) – £50,271 to £150,000
- 45% (Additional rate) – Over £150,000
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 above.
You can view current and previous Income Tax rates and Personal Allowances online.
National Insurance Contributions (NIC)
In addition to Income Tax, employees and their employers must make Class 1 National Insurance Contributions on earnings above a certain level.
On your director’s salary, you will pay 12% NIC on earnings above £9,568/year (Primary threshold) up to £50,270/year (Upper Earnings Limit). The rate is reduced to 2% for any income above the Upper Earnings Limit.
Additionally, your company will have to make employers’ National Insurance Contributions at a standard rate of 13.8% on your salaried income above £8,840 per year (Secondary Threshold).
You can view current and previous NIC rates and thresholds for employees and employers online.
What taxes are paid on dividends?
Directors who receive dividend payments are liable to pay Income Tax on any payments above the £2,000/year Dividend Allowance. The rate of tax will depend on the individual’s income tax bracket. However, the tax rate applied to dividend payments is lower than the equivalents for salary payments, with the current rates as follows:
- £12,571 to £50,270 (Basic rate) – 7.5%
- £50,271 to £150,000 (Higher rate) – 32.5%
- Over £150,000 (Additional rate) – 38.1%
Unlike salaries, paying dividends is not classed as a business expense, so they cannot be deducted from your Corporation Tax bill. Instead, dividends are distributed from profits, which means that companies will have already paid 19% Corporation Tax on that income before it is paid to shareholders. This is the reason for the tax-free Dividend Allowance and lower rates of Dividend Tax.
More information about tax on dividends is available from HMRC online.
What taxes need to be paid on directors’ loans and expenses?
A director’s loan is essentially any money that you take from your company that is not a salary, dividend, or allowable expense. These loans can also work the other way around – by lending money to your company, for example, to buy equipment or to help with temporary cash flow issues.
Whilst such loans must be repaid, they provide an opportunity for tax-free borrowing over the short term.
However, you may have to pay tax if you take a director’s loan: If you’re overdrawn on your director’s loan account at the end of the company’s financial year, there will be what is known as an S455 charge.
S455 tax is calculated as part of the Corporation Tax Return at a rate of 32.5% of the outstanding balance at the company year-end. This charge is payable if the loan account is not cleared within 9 months of the company year-end. Any S455 tax paid will be refunded to you when the director’s loan is repaid. Therefore, S455 is essentially a holding tax.
From a personal tax point of view, HMRC considers a director’s loan in excess of £10,000 as a benefit in kind. If the company does not charge you interest on the loan or charges less than the official rate, HMRC will charge the official rate of interest to calculate the benefit in kind.
For 2021/22, the official rate of interest is 2% and so if a loan of £10,000 has been outstanding for 12 months, the benefit in kind would be £200.
Expenses come with different tax liabilities, and some are tax-free (e.g., certain childcare costs). Guidance on expenses and benefits for employers is available online.
What is the most tax-efficient way to pay myself?
The most tax-efficient way for a company director to be paid is a combination of a salary (through PAYE) and dividends. Further efficiencies can be gained by availing oneself of tax exemptions and using directors’ loans and expenses where necessary.
The key lies in taking advantage of any personal allowances and tax-free options, whilst at the same time minimising Corporation Tax and legally avoiding other company liabilities where possible.
The most tax-efficient approaches for company directors will vary depending on the specific circumstances and the tax rates and bands for the year, but the basic approach is as follows:
Step 1 – Salary
Multiple directors or companies with more than one employee
In companies with at least two employees, the directors can take a salary (PAYE) of £12,570 and claim the Employment Allowance (see below). This approach will avoid Income Tax liability, whilst at the same time enabling the salary to be deducted from company profits, thus lowering the Corporation Tax bill.
There will be a small amount of NIC to pay (since the Personal Allowance threshold is above the NIC thresholds) both on the employee and employer sides.
Sole directors with no other employees
In companies where there is a single director and no employees, the Employment Allowance cannot be claimed. Therefore, the most tax-efficient approach (for the 2021/22 tax year) will be to take a salary up to the Primary Threshold of £9,568 per annum. It should be noted that this will entail some administration in respect of payment of a small element of employers’ NIC.
An alternative method is to take a salary up to the Secondary Threshold of £8,840 per annum. This will avoid NIC altogether and the ensuing administration, but is marginally less tax efficient.
Please note: While only paying up to the NIC thresholds can be tax-efficient it is not the right thing for everyone. Remember, to get the full state pension on retirement you need to have made a total of 35 qualifying years of National Insurance Contributions or credits.
While you can choose to make voluntary contributions, it is a lot easier to just keep your contributions up to date by making regular payments via PAYE.
So, if someone is anticipating the state pension as being a significant source of income on retirement, it may be preferable to take a salary up to the Income Tax threshold.
Step 2 – Dividend payments
Draw dividend payments of at least £2,000. Beyond the tax-free Dividend Allowance of £2,000, it is best to only take what is necessary and leave the remainder in the business as retained earnings.
The tax paid on dividends will be lower than the tax paid on an equivalent salary. This is because the rates are lower than the corresponding Income Tax rates, and there is no NIC to pay.
Although dividends cannot be declared as a business expense (whereas salaries can), the Corporation Tax and Dividend Tax payable on this money is still lower than the combined rates of Income Tax and NIC.
It is worth remembering that any given person may have other small, or not-so-small investments where dividends are received and are already eating into the £2,000 Dividend Allowance (and bracket of income taxed at 7.5%). So, be careful and check all investments for dividend payments as you may already have used all or part of your tax-free allowance.
Step 3 – Expenses, directors’ loans, pensions, etc
Expenses
There are a variety of allowable business expenses, and some company owners make substantial use of expenses and benefits on top of their salary and dividends. The expenses and benefits that can be claimed include but are not limited to:
- Pension and retirement benefits schemes
- Computers and office equipment
- Training costs
- Company cars
- Fuel expenses (mileage allowances) and parking charges
- Medical insurance
- Travel expenses, meals, and entertainment costs
- Childcare
There are different taxation and reporting rules depending on the type of expense. An A to Z of expenses and benefits, along with the relevant tax rules and rates, can be viewed at GOV.UK.
Tax reliefs
Aside from business expenses, there are Income Tax reliefs, which consist of:
- Methods of paying less tax, to take into account money that has been spent on specific things; and
- Ways of reclaiming tax or getting it repaid in another way, such as into a personal pension
Although some of the tax reliefs are automatic, it is necessary to apply for others. Tax reliefs include:
- Pension contributions
- Charity donations
- Maintenance payments
Directors’ loans
A company director can make use of business funds, for a limited time and without paying any tax, through a director’s loan. However, strict time limits apply. If loans are not repaid on time, Corporation Tax and Income Tax will be levied.
Furthermore, it is not possible to simply keep making the same loan over and over again. This is known as ‘bed and breakfasting’ and will attract tax.
Pensions
One of the most tax-efficient ways of extracting profits from a business is to put funds into a pension fund. Making pension contributions avoids Corporation Tax, Income Tax and NIC – as long as it falls below the annual allowance for tax-free pension contributions, which is currently £40,000.
Furthermore, if money is taken out of the pension pot (when this is permitted – normally not before the age of 55), 25% of any amount taken is tax-free.
Employment Allowance
The Employment Allowance is a scheme that allows limited companies – whose employers’ Class 1 National Insurance liabilities were less than £100,000 in the previous tax year – to reduce their annual NICs by up to a maximum of £4,000 each tax year.
It cannot be claimed by companies that (i) have only one employee who is paid above the Class 1 National Insurance secondary threshold and (ii) where that one employee is also a director of the company. In other words, it cannot be claimed by sole directors who work alone.
What this means in terms of tax efficiency is that sole directors with no other employees may want to consider taking a salary of no more than the Primary or Secondary Thresholds (i.e., before NIC kicks in), whereas multiple directors or those with other employees can take up to £12,570 (the maximum Personal Allowance) and then claim the Employment Allowance to offset NIC.
And there you have it.
We have discussed the question – what is the most tax-efficient way to pay myself from my limited company?
It should be stressed that the figures quoted represent the optimal solution from a tax point of view, but they need to be tempered with reality. That is, how much you need to take out of your company to cover your cost of living and how much you feel your hard work is worth.
Regardless of what you decide to pay yourself, I would always recommend you take advice from a professional, such as an accountant or specialist tax advisor, especially when considering tax reliefs and benefits in kind which are complex areas of tax.
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