It’s relatively easy to pay yourself a salary if you are the director of a limited company. However, you might want to know how to do it in a way that means you pay less tax. Therefore, we will explore the options available to you in this article.
Paying Yourself a lower Salary is More Beneficial than Not Paying Yourself a Salary
In order to cover the costs of living, many self employed individuals need to take money from their business. Even if you have savings, you’ll always want to take money from your business. If you have a salary through PAYE, then this will count towards allowable expenses and that will reduce your corporation tax bill at the end of the year. You will be liable to income tax on any earnings over £12,500 though. If you take a salary that’s over the Lower Earnings Limit, which is just above £6,000, then you will also continue to contribute towards your state pension. So, paying yourself a salary of £6,000 to £12,500 will give you a more tax efficient option not paying yourself a salary
Taking a Higher Salary – What Are The Benefits?
Depending on your profits, you could add to your salary with tax-efficient dividends or you could opt to give yourself a higher salary and pay the relevant income tax that you’ll need to pay. However, there are some advantages that come with paying yourself a higher salary.
Taking a bigger salary will mean that you are making the most of your yearly tax-free personal allowance. It also enables you to show your earnings when you choose to apply for a mortgage or a loan. Furthermore, female directors who pay themselves a proper salary are likely to be able to access maternity benefits which means that National Insurance should have been paid for a minimum of 13 weeks of the 66 weeks leading up to the due date.
Using Dividends to Pay Yourself
Often, a combination of salary and dividends proves to be the most efficient way of reducing your tax and taking money from your company. Dividends are a portion of the profit of the business and can either be put back into the business or shared among shareholders, which could be you if you own the business yourself.
There is administration involved in taking advantage of dividends but your accountant can take care of that for you. Dividends are not considered to be a business expense so they won’t reduce the amount of corporation tax you have to pay. Furthermore, dividends can only be used if there is enough profit in the business once tax has been paid. When it comes to tax, income from dividends is susceptible to a lower rate of tax than salary income which can help you to grow your earnings without the need to pay more tax.
Those who pay a basic rate of tax will pay 7.5% on dividends while those who pay the higher rate of tax will pay 32.5%. It’s also possible to access £2,000 dividends every year that are tax free along with your personal tax allowance of £12,500, this then gives you a total of £14,500 before you’re required to pay tax. Through topping up your earnings with additional £35,500 of dividends, you could end up paying yourself £50,000 while paying just £2,662.50 in tax.