How to Pay Yourself From a Limited Company

Running a limited company instead of being a sole trader has many advantages, such as tax benefits and ways to pay yourself that save money on taxes. When you run a limited company, you have more tax-efficient ways to pay yourself, such as a combination of salary and dividends, which are taxed at a lower rate. You can also give yourself more money through pension contributions, which are also a great way to save on taxes.

In this blog, we talk about how to pay yourself from a limited company so that you pay the least amount of tax. These ways include income tax, dividend tax, and national insurance contributions. Read on to learn how to pay yourself the least amount of tax.

Should I Pay Myself a Salary or Dividends?

The simple answer is that to save money on taxes, it’s usually best to pay both salary and dividends if your business makes enough money. Most of the time, the most tax-efficient way to pay yourself through your limited company is through a mix of salary and dividends.

Paying Yourself a Salary

Salaries are the first step to getting money from your limited company for yourself. You need to run a PAYE scheme and report to HMRC if you want to pay yourself a salary. A good place to start with tax-efficient remuneration planning is to pay a small salary.

If you don’t have any other income besides dividends, you can pay yourself a salary of up to £12,570 without having to pay income tax on it. However, you will have to pay some national insurance. It might be worth paying less than the tax-free personal allowance to keep from having to pay employee and employer national insurance (see below re: national insurance contributions).

If you pay more than £12,570, which is your personal allowance, you will have to pay income tax. The rates of income tax right now are:

Corporation Tax and Allowable Expenses

The good thing about paying yourself a salary is that it counts as a business expense and will lower the amount of corporation tax your company has to pay. (Dividend payments are not a business expense that can be claimed.)

As a limited company, you have to pay Corporation Tax on the money you make. But there are some business costs that are legal and will cut both your profit and your Corporation Tax bill. Since salaries are tax-deductible expenses, if you pay yourself a salary, you will make less money and pay less Corporation Tax. Here is a full list of expenses that can be paid for.

Consider National Insurance Contributions

If you want to be eligible for certain benefits, you will need to pay national insurance contributions on your salary. You need to know that there are different thresholds for National Insurance for both employers and employees.

For example, if you decide to pay yourself a salary from the business that is higher than the National Insurance threshold for employer and employee NI, you will have to pay NI as an employee and the business will also have to pay employer’s NI. Since you’ll be paying National Insurance twice, this may not be the best way to pay yourself if you want to save money on taxes.

National Insurance Effect on Benefits and State Pension

Contributions to national insurance can affect your ability to get benefits and the state pension in the future, so you should keep track of how many national insurance credits you have or need to get. If you take a job that pays more than the Lower Earnings Limit (LEL), which is £6,396 per year in 2022/23, you will be able to build up years toward your future State Pension.

If your salary is above the LEL but below the Primary Threshold (£9,880), you’ll get the benefits of NI without having to pay for it. Your NI contributions and credits can affect your state pension and other benefits like the job seekers allowance in the future. How much Child Benefit you can get may also depend on how much money you make (salary plus dividends). Your history with national insurance and how many national insurance credits you have should also be taken into account.

Paying Yourself Via Dividends

After paying corporation tax, if your limited company makes a profit, this money can be given as dividends to the people who own shares in the company. Dividend tax is a type of personal tax that shareholders who get dividend payments will have to pay on these dividends.

Dividend tax rates can be much lower than regular income tax rates, and they don’t have to pay national insurance. This makes dividends a very tax-efficient way to pay yourself.

Dividend Tax Rates

Your Income Tax band determines how much tax you have to pay on dividends above your dividend allowance. The amount of tax-free dividends is £2,000. The tax rates on dividends are:

• On income over the personal allowance up to £37,700, the basic rate of dividend tax is 8.75%.
• The higher rate dividend tax is 33.75% on taxable income between £37,701 and £150,000
• If your taxable income is more than £150,000, you have to pay 39.35% more in dividend tax.

Can I Give Myself a Monthly Dividend?

There are no rules about how often shareholders get dividends. So, you can always give yourself a dividend. But it’s best to pay these every month or every three months. As long as the profits are high enough to pay the dividends. Keep your dividend payments and salary payments separate so that the audit trail is clear.

Just remember the dividend tax rates and thresholds above when you and other shareholders get dividends. This will help you pay the least amount of tax.

Tax-efficient Pension Contributions

Your limited company can put money into pension plans for its directors and employees. There are limits on how much a person can put into a pension. Most people have an annual pension allowance of £40,000 per tax year.

Allowances from the last three tax years that were not used can also be used. The pension contributions that the company makes are also tax deductible for the company, which means that the company pays less corporation tax. This makes pension contributions a great way to pay yourself from company profits while minimising taxes.

Expenses

There are many business expenses that are legal, and some business owners use expenses and benefits in addition to their salary and dividends. Among the costs and benefits that can be claimed are the following:

• 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.

Directors’ Loans

A director’s loan lets a person in charge of a business borrow money from the business for a limited time without having to pay taxes. But there are strict time limits. Corporation Tax and Income Tax will be charged if loans are not paid back on time.

A director’s loan is not a payment in the same way that salary or dividends are, but it is very important to keep good records because director’s loans have their own tax rules. A “director’s loan account” is what you call this set of records.

It’s also important to remember that you can’t just keep making the same loan over and over again because you’ll have to pay tax on it. “Bed and breakfasting” is the term for a director who pays back a loan within 9 months but then takes out another loan right away.

Conclusion

In this blog, we’ve talked about the basic answers to the question, “What’s the best way to pay myself with the least amount of tax?” But there are many other things to think about before deciding how to pay your taxes in the best way. Think about how much money you need to live, how much money you get from other sources, and if you need to pay employee national insurance contributions to get benefits or a state pension in the future. All of these things can change how much and how you decide to pay yourself from your business.