Through your Limited Company, in most cases, you will pay yourself via a combination of salary, dividends and perhaps through contributing to a pension too. The most important thing to keep in mind when paying yourself is to plan for tax well in advance, in order to maximise the take home pay that you’ll receive and reduce your tax bill legally.
Let’s look at Salary
Despite being the Director, Owner and employee of your Limited Company, you will need to pay both Employers and Employees NIC. However, this is only applicable if the salary exceeds £8,632 (in 19/20).
Therefore, when you are calculating the salary to pay yourself, the most tax-efficient salary is £8,632, as it won’t incur any tax or National Insurance. The current Personal Allowance is £12,500 – once you exceed this, you will start paying income tax.
What about Dividends?
The rest of your pay could then be taken via dividends, but only if the business has made enough of a profit, once all expenses are paid and tax obligations met (keep in mind that if the business has not made enough profit, then it is illegal to pay dividends). The 19/20 tax free allowance for dividends is £2000, and dividend payments should be in line with the ownership stake in your business.
Contributing to a pension scheme
Currently, the 19/20 pension contribution allowance is £40,000 (or 100% of your salary for the year, whichever is the lower amount). Please keep in mind that if you go over this limit, you may have to pay a charge. As a workaround, you may be able to bring unused allowances forward, from the previous three years. Pension contributions made will be deductable from corporation tax, again reducing your overall tax bill.
Closing comments
By planning in advance and understanding salaries, dividends and pension contributions, you will be able to forecast and pay tax in the most efficient manner. As always, if you’re unsure about any of these points, and want to make sure you’re compliant with HMRC’s regulations, please don’t hesitate to get in touch with Mark.