Running your own 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 at regular intervals, or when company profits allow.
Directors’ loans, business-related expenses, and various allowances and tax reliefs are also available. All of these things can contribute toward an overall ‘package’ of tax-efficient remuneration and benefits.
To help you establish the best income structure, we explain the different options available to you, and the various taxes that you will need to pay. Ideally, however, you should consult an experienced accountant for professional advice tailored to your individual needs. Doing so will ensure the best outcome for both you and your company.
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 that 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 whilst also claiming legitimate business-related expenses. Director’s loans are not as common, but they 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 each of 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 – in the same way as 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 (NIC) are then 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 that is left over after you’ve accounted for all business overheads and other expenses.
However, your company will have to pay employer’s National Insurance if your salary is over a certain amount.
Income Tax
Above the standard tax-free Personal Allowance (£12,570 for the 2023-24 tax year), 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 are slightly different from those outlined above, but the Personal Allowance is the same.
National Insurance contributions (NIC)
In addition to Income Tax, employees (including directors) and their employers must make Class 1 National Insurance contributions when earnings reach a certain level.
On your director’s salary, you will pay 12% employee NIC on earnings above £12,570 per year (NIC Primary Threshold) up to £50,270 per year (Upper Earnings Limit). On income above the Upper Earnings Limit, you will pay a reduced rate of 2%.
Your company will also have to pay 13.8% employer’s National Insurance contributions on your salary income above £9,100 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 bracket.
The dividend tax rates for 2023-24 are as follows:
- 8.75% (basic rate) – if annual earnings are between £12,571 and £50,270
- 33.75% (higher rate) – if annual earnings are between £50,271 and £125,140
- 39.35% (additional rate) – if annual earnings are 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 that you receive. Your combined earnings for the year will determine whether the basic, higher, or additional rate of tax applies to you.
There is an annual dividend allowance of £1,000 for 2023-24 tax year. This means that the first £1,000 of dividend income is tax-free. You also won’t pay tax on any dividend income that is within your Personal Allowance.
Dividends are not paid or taxed through PAYE. Instead, you are personally responsible for reporting and paying tax on your own 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 net profit that is left after the company has deducted 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 that you take from your company for personal use that is not one of the following:
- your salary
- a dividend
- an expenses repayment
- reimbursement of money that you have 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 and it 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 charges less than the official rate, HMRC will charge the official rate of interest to calculate the benefit in kind.
For 2023-24, the official rate of interest is 2.25%. Therefore, if a loan of £10,000 was outstanding for 12 months, the benefit in kind would amount to £225.
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 instead, rather than claiming reimbursement from the company.
Detailed guidance on expenses and employee benefits is available from HMRC.
What is the most tax-efficient way to pay myself?
If you are a director and shareholder of a company, the most tax-efficient way to pay yourself is to take a combination of a salary (through PAYE) and dividends.
You can achieve further efficiencies by claiming expenses, taking advantage of various allowances and tax reliefs, and making use of a director’s loan where necessary.
The most tax-efficient method of payment for company owners depends on their specific circumstances, as well as the tax rates and thresholds for the year, but the basic approach can be found below.
Step 1 – Director’s salary
Companies with multiple directors and/or at least one other employee
If your company has at least two directors, or at least one employee who is not a director, 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, and the company can deduct the salary payments as a business expense. This will lower the company’s taxable profits and Corporation Tax bill.
You won’t pay any Class 1 employee NIC because your salary does not exceed the NIC Primary Threshold. The company will have to pay Class 1 employer’s NIC on your salary income above £9,100. However, the Employment Allowance will cover this.
Companies with a sole director and no other employees
If you are the sole director of your company and you 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 £9,100 per year. By doing so, you will avoid employee and employer’s NIC 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 marginally less tax-efficient, because the company won’t be eligible for Employment Allowance to cover the cost of employer’s NIC.
Pay yourself a high enough salary to qualify for the State Pension
To get the full State Pension on retirement, you need to have 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 £6,396 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 is a lot easier and more cost-efficient to keep your NIC 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 £1,000 of dividend income is tax-free
- dividend tax rates are lower than Income Tax rates
- you don’t pay NIC on dividends
Beyond the tax-free dividend allowance of £1,000, you can pay yourself any amount of dividends, provided that the company has available profit to distribute after it has paid Corporation Tax.
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.
Whilst companies cannot claim dividends as a business expense (unlike salaries), the total Corporation Tax and dividend tax liability on this money is usually less than the combined rates of Income Tax and NIC that apply to salary income.
Let’s take a look at a couple of examples of the tax payable on an annual personal income of £50,270. We’re using this amount because it is the earnings limit for the basic rate tax band.
Example 1: Take an annual salary of £12,570 and dividend income of £37,700
You will pay:
- no Income Tax on your salary, because it does not exceed the tax-free Personal Allowance
- no Class 1 employee NIC on your salary, because it does not exceed the Primary Threshold
- no dividend tax on the first £1,000 of dividends
- basic rate dividend tax of 8.75% on £36,700, which is £3,211.25
Your total take-home earnings for the year will be £47,058.75 (£12,570 salary plus net dividends of £34,488.75).
The company will pay Class 1 employer’s NIC of £478.86 on your salary. And remember, since dividends are distributed from post-tax business profits, the company will have already paid £8,843.21 of Corporation Tax (19% of the pre-Corporation Tax value of this income) before paying your dividends.
Total tax liability on your income will be £12,533.32 (dividend tax, employer’s NIC, and Corporation Tax).
Example 2: Take an annual salary of £49,270 and dividends income of £1,000
You will pay:
- no Income Tax on the first £12,570 of your salary
- basic rate Income Tax (20%) on the remainder of your salary, which is £7,340.00
- Class 1 employee NIC on your salary, which is £4,404.00
- no dividend tax on the £1,000 dividend income
Your total take-home earnings for the year will be £38,526.00 (net salary of £37,526 plus £1,000 dividends).
The company will pay Class 1 employer’s NIC of £5,543.46 on your salary. Since dividends are distributed from post-tax business profits, the company will have already paid £234.57 Corporation Tax (19% of the pre-Corporation Tax value of this income) before paying your dividends.
Total tax liability on your income will be £17,522.03 (Income Tax, employee NIC, employer’s NIC, and Corporation Tax).
As you can see, it is far more tax-efficient for both you and your company to keep your salary small and take the bulk of your personal income as dividends. And remember, you may be able to offset employer’s NIC if the company is eligible to claim Employment Allowance.
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 NIC 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 that 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 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 over and over again, 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 it 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 pension contributions avoids Corporation Tax, Income Tax, and NIC – as long as it falls within the annual allowance for tax-free pension contributions. This is currently £60,000 in the 2023-24 tax year.
Moreover, if you take money out of your pension pot (when this is permitted – normally 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 limited companies to reduce their annual employer’s NIC by up to £5,000 each tax year. You can claim this allowance if:
- your company’s National Insurance liability was less than £100,000 in the previous tax year
- the company has at least one employee (who is not a director) who is 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.
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 liability kicks in).
Whereas, in a company with multiple directors or other employees, directors can take salaries up to £12,570 (the limit of their annual Personal Allowance). They can then claim the Employment Allowance to offset the National Insurance contributions payable by the directors and the company.
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 would always 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.
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