One question we often encounter from Company Directors is – what’s the best way for you to pay yourself from your Limited Company’s earnings?
If you’re a Limited Company Director, you have three main options for paying yourself – taking a salary, issuing dividends, or doing a bit of both.
The best option for you depends on several factors, with your company’s profitability playing a major role.
Taking a Salary
When looking at a Limited Company Director’s salary, you decide the amount. However, it’s essential your salary aligns realistically to the company’s profitability.
If you do pay yourself a salary, you must set up a PAYE scheme and pay any PAYE and NI as it falls due.
At Blue Spire, we typically recommend you limit your salary to the NI threshold – which stands at £9,100 currently. By doing this, you bypass any NI contributions, however, you will accrue credit toward your state pension.
Dividends
Dividends offer substantial tax advantages, as they are not subject to National Insurance contributions and are taxed at a lower rate compared to salaries.
Profits remaining post salary allocation can go towards dividends. It’s pivotal to steadily track profitability, perhaps monthly or quarterly, to keep on top of your spendable income.
Combine both Salary and Dividends
Combining a salary and dividends is usually the most tax-efficient method of extracting money from your company. A small salary can help maintain your National Insurance record whilst minimising NI costs.
Dividends top-up your income tax efficiently with little to no NI implications. However, it’s crucial to remember to declare dividends on your Self-Assessment tax return. So, strategically using a mix of both these options might prove beneficial.
The Self Assessment procedure can often seem bewildering for company directors, mainly because their income comes from different sources but your Accountant can help provide advice.
Directors’ Loans
A Director’s loan is money paid to you from the company which isn’t a salary, dividend or a reimbursement for expenses.
You can take this route provided the loan account is settled within nine months following your company’s financial year-end. If not, HMRC will consider this as income derived from your business and it will become taxable.
How Blue Spire can help
The combination of a salary and dividends from your Limited Company might seem like a balancing act, but with our dedicated team to support you, it’s simpler than it appears.
Based on your individual situation and the unique needs of your business, we offer tailor-made advice, help you understand tax liabilities, and formulate the most efficient remuneration structure.
| If you have any questions or need advice on any of the above, then please do not hesitate to contact us. |
