Understanding how to pay yourself as a limited company in the UK shouldn't be complicated.
Most owners of limited companies will find that paying themselves a small ‘Directors Salary’ (£8,840 per year in 2021/22), then topping it up with dividends is the most tax-efficient way.
📌 Full guide to dividends and paying yourself as a director: www.business4beginners.co.uk/...
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What is a ‘Directors Salary’?
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A ‘Directors Salary’ is the amount paid to a director that ensures it's the most tax-efficient amount for the individual.
You pay income tax on all salary payments you receive.
The income tax rates for 2021/22 are:
- Personal allowance = £12,570 (0%)
- Basic rate = £12,571 to £50,270 (20%)
- Higher rate = £50,271 to £150,000 (40%)
- Additional rate over = £150,000 (45%)
Note: You don't get a Personal Allowance on taxable income over £125,140
There are no changes planned for these bands for the tax year 2022/23.
To qualify for state benefits (such as a pension) you must earn more than the Lower Earnings Limit (LEL). In 2021/22 this was £520 per month or £6,240 per year.
You’ll start making personal National Insurance contributions when you earn at least £797 per month or £9,568 per year (2021/22).
Your company will begin paying National Insurance on salary payments to you when you earn at least £737 per month or £8,840 per year (2021/22).
Any salary payments will be counted as a business expense and will, therefore, help to reduce your Corporation Tax liability.
What Is A Dividend?
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The ‘Dividend’ is paid to all shareholders in a business and is based on company profits.
- You can only pay dividends if your company has made a profit
- They can’t be classed as a business cost
- Each shareholder gets a dividend proportionate to their shareholding
The good news? Everyone gets a tax-free dividend allowance (In 2021/22 this was £2,000) and the rates of tax on dividend payments are lower than the income tax rates charged on salaries.
In 2021/22 the tax rates on dividends (based on total earnings) are:
- Basic rate = £14,571 to £50,000 (7.5%)
- Higher rate = £50,271 to £150,000 (32.5%)
- Additional rate over = £150,000 (38.1%)
Note: There are some small increases planned for 2022/23, but the tax-free allowance will remain the same.
Why Pay A Directors Salary Topped Up With Dividends?
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While there are several other factors to consider and allowances you may qualify for (remember to get advice from an accountant), for most, a small Directors Salary topped up with dividends will be the most tax-efficient way to pay yourself as a limited company.
Here’s why…
The optimum Directors Salary for most people will be £736 per month or £8,840 per year. This takes advantage of your personal allowance and qualifies you for state benefits. Yet, it is below the amount when National Insurance contributions will need to be made by the business.
What about the rest of your personal allowance? Well, that can be allocated to your dividends.
If you pay yourself a Directors Salary of £8,840 per year, you’ll have £3,730 left of your personal allowance (based on 2021/22 tax rates). Add the additional £2,000 tax-free dividend allowance and you won’t pay any tax on your first £5,730 of dividend payments.
Anything above this will be charged at the dividend tax rates which are lower than the income tax rates charged on salaries.
How To Pay Yourself
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The main thing to remember is that salary payments need to go through Payroll and be reported to HMRC via PAYE. You'll need to register for PAYE first then setup Payroll. If you're using an accounting software, this will usually be built it.
Each month, you'll 'run' Payroll then do a bank transfer to send yourself the cash. Any amounts due to HMRC will need to be paid too.
For Dividends, just transfer yourself the cash and make sure they are recorded correctly in your accounting software.
Resources
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Payroll Explained: www.business4beginners.co.uk/...
Recommended Accounting Software: www.business4beginners.co.uk/...
Recommended Accountants: www.business4beginners.co.uk/...
HMRC (Income Tax): www.gov.uk/income-tax-rates
HMRC (Dividends): www.gov.uk/tax-on-dividends
DISCLAIMER: The information contained in this video is for general information purposes only. Any reliance you place on such information is therefore strictly at your own risk. Always consult with a qualified accountant to get professional advice tailored to your individual situation.
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