If you are a shareholder/director of your limited company, regardless of size, you will need to choose how much to pay yourself. In this article we aim to show you the most tax-efficient way of taking an income from your own Limited Company.
Most shareholder/directors of limited companies pay themselves via a combination of salary and dividends.
Employers and Employees both pay National Insurance Contributions (NICs) on salary payments, but not on dividends. Therefore, it makes sense to pay yourself a smaller salary to avoid the NIC’s and make up your drawings by taking dividend payments.
As a director you are technically an employee of your own limited company whilst at the same time you are an employer.
Tax is payable once you earn in excess of your personal allowance of £12,570.00. However, you will also have to pay NICs if your income passes the NIC Primary Threshold (currently £12,570). In addition, employer NICs become payable on any employee earnings above £9,100.
As a director, it’s a good idea to take at least a small salary. This means putting yourself on your company’s payroll. There are several benefits of taking part of your income as salary.
Note that in order to build up qualifying years for the state pension your salary must hit the NIC Lower Earnings Limit (currently £6,396) or higher. The majority of directors therefore set their salaries between the Lower Earnings Limit and the Primary Threshold, so as to keep their state pension but avoid paying National Insurance liabilities.
As already explained, many shareholder/directors choose to take the majority of their income in the form of dividends, as this is usually more tax efficient.
A dividend is simply a share of the company’s profits. Profit is what is left over after the company has settled all its liabilities, including taxes. If there is no profit, then no dividends can be paid.
Dividends can be paid to shareholder/directors and other shareholders, according to the proportion of shares that they hold. There is no requirement to pay all the profits as dividends, or even any of them. A company can retain profits over a number of years and distribute them as the board decides.
By taking most of your income in the form of dividends, you can significantly reduce your income tax bill.
You have a tax-free dividend allowance, which is in addition to your personal allowance. In the 2023/24 tax year this allowance is £1,000. This means that you can earn up to £13,570 before paying any income tax at all. Basic rate tax payers pay 8.75% tax on dividends up to a threshold of £50,270. Higher earnings will be taxed at 33.75%.
Of course, there are drawbacks to taking dividends which include the following:
Now that we have taken on board all the above points, there is one further consideration! Are you a sole director or are there more people in the business?
Having at least one employee, or 2 or more directors, on the company payroll means that you’re eligible to claim the Employment Allowance, so you can take a higher salary and still be tax efficient.
|The most efficient salary for 2 or more directors in 2023/24 is|
This is because two or more directors can take an annual salary up to the Primary Threshold without needing to pay employee’s National Insurance, and then claim the £5,000 Employment Allowance to cover the portion of employer’s National Insurance they would otherwise incur.
If you are a sole director you cannot claim the Employment Allowance. However, you still have two options which are detailed below.
A sole director taking a salary at this level will attract Employers National Insurance but this would be offset against the tax relief claimed against Corporation Tax. The reduction to your Corporation tax is higher than the value of Employer NI.
Alternatively, you can take a slightly lower salary as a sole director/shareholder. leaving more money for dividends at the end of the year and there is no National Insurance to pay.