Haven’t received a wage from your limited company?

Then you’ve got to read this.

You own a limited company, and even if your business is your baby, you still need to pay yourself enough to keep your life going and ensure you put food on the table.

‍One of the main differences between being paid by an employer and running your own business is having to sort out how your limited company pays you. Running a limited company gives you more tax efficient ways of paying yourself and this includes a combination of salary and dividends, as dividend payments attract a lower tax rate. You can also pay yourself additional money via pension contributions that are also extremely tax efficient.

But how much do I pay myself?

Wanting a pay is the first need. You still need to decide what to pay yourself. That number needs to strike a balance between your household/personal requirements and your business needs.

What would the business need:

Expenses: Keep a formal list of what you owe and when it’s due so you don’t draw too much from the business at the wrong time.

Rainy day funds: Tuck away some cash to ride out business disruptions. You might keep enough aside to cover 30, 45 or 90-days worth of expenses, for example.

Reinvestment: Hold onto some money for developments and improvements. Someday you’ll want to buy new work tools, try a new marketing idea, or hire a consultant.

What would the household need:

Your household budget needs to cover day-to-day living expenses and debt repayments such as mortgages. Don’t forget to make a plan for insurance and retirement, which your employer may have managed before you ventured out on your own.

Finding a balance:

There will be negotiable items in both the home and business budgets. Be prepared for some give and take – especially during the early days of your business.

How do I pay myself if I run a limited company?

If you are a limited company paying yourself, things work quite differently because you are an employee of the company, even if you are the sole employee.

In this instance, it might help to think of your business and yourself as two separate entities.

If you pay yourself under £486 per month you can be exempt from paying tax, yet if you earn more, then you need to register yourself as an employer at the government website.

From there you’ll receive two letters from HMRC which will include your PAYE and Accounts Office references and your activation code for PAYE online. After this, you will need to set up a payroll.

These are the most tax-effective ways you can pay yourself if you own a limited company.

  1. Paying yourself a salary

Salaries are the starting point for paying yourself from your limited company. To pay yourself a salary, you need to run a PAYE scheme and report to HMRC. Paying a small salary is a starting point of tax efficient remuneration planning.

As a UK taxpayer, each year you’ll have a Personal Allowance – any income you receive up to the Personal Allowance is free from Income Tax, which was frozen until 2026 by chancellor Rishi Sunak. That means for the 2024/25 tax year, the threshold remains at £12,570.

Income Tax

Above the standard tax-free Personal Allowance (£12,570), you will pay the following rates of Income Tax on your director’s salary:

  • 20% (Basic rate) – £12,571 to £50,270
  • 40% (Higher rate) – £50,271 to £125,140
  • 45% (Additional rate) – over £125,140
  1. Paying yourself via Dividends

If a limited company has made a profit after paying corporation tax, this can be distributed to the shareholders of the company in the form of dividend payments.

Recipients of dividend payments will need to pay tax on their dividends.

Most company owners take the majority of their earnings as dividend payments because:

  • the first £1,000 of dividend income is tax-free
  • dividend tax rates are lower than Income Tax rates
  • you don’t pay NIC on dividends

Dividend tax rates for 2024/25

The tax-free dividend allowance for 2024/25 has been cut from £1,000 to £500. Above this amount, any dividends you receive from your limited company will attract the following tax rates, based on whichever Income Tax band(s) you fall into:

  • 75% (basic rate) – income from £13,070 up to £50,270
  • 75% (higher rate) – income from £50,271 up to £125,140
  • 35% (additional rate) – income above £125,140

Dividends are not a business expense, so you cannot deduct these payments from your company’s Corporation Tax bill. This is because companies pay dividends out of profit after tax – i.e. the net profit that is left after the company has deducted Corporation Tax and other expenses from its income. This is why dividend tax rates are lower than Income Tax rates.

Can I pay myself a dividend every month?

There aren’t any rules on how often dividends are paid out to shareholders. So, you can pay yourself a dividend whenever you like. However, it’s good practice to pay these monthly or quarterly. As long as you have sufficient profits to pay the dividends.

Keep your dividend and salary payments separate just to provide a clear audit trail.

Just keep in mind when paying dividends to yourself and other shareholders the dividend tax rates and thresholds above to minimise tax.

  1. Tax efficient pension contributions

In the 2023/2024 tax year, making pension contributions through your limited company remains a highly tax-efficient strategy for compensating directors and employees.

An individual’s pension annual allowance typically stands at £60,000 per tax year. However, it’s important to note that unused allowances from the previous three tax years can also be utilized, providing potential opportunities for additional contributions.

Maximizing Tax efficiency:

To maximize the tax efficiency of pension contributions, it’s essential to stay within the annual allowance limits and utilize any unused allowances from previous tax years effectively. Additionally, seeking professional advice from financial experts can help optimize pension contribution strategies tailored to individual circumstances and long-term financial goals.

 And there you have it…

We have discussed the question – how can I pay myself from a limited company and given you some tips on how to make it tax-efficient.

However, it should be stressed that the figures quoted represent the optimal solution from a tax point of view, but they need to be tempered with reality. That is, how much you need to take out of your company to cover your cost of living and how much you feel your hard work is worth.

Regardless of what you decide to pay yourself, there are complex areas of tax which AccNet can help you with. Call us on +44 2070973767 when you’re comfortable to discuss and we will be there to help you every step of the way.

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