It’s possible to make considerable tax savings when you pay yourself from a limited company. Working via an umbrella company or as a sole trader can also cause you to pay more tax. If you become a limited company director, you may gain access to a range of methods for enhancing your take-home pay.
The four main options available to you as a limited company director are to pay yourself a salary, to use a director’s loan, to receive dividend payments and to get reimbursement of expenses. What’s right for one director isn’t always great for everyone else. This is why it’s important to choose carefully so you’re not handing over more to the taxman than necessary, whatever sector you’re based in.
Ways to pay yourself from a limited company:
The salary option
Opting for a salary can give you a monthly wage when you pay yourself from a limited company, even if most of your income comes from elsewhere. Your salary will have income tax and National Insurance payments deducted from it. It’s simple to transfer it from your business bank account to your personal one.
You’ll need to register your limited company with HMRC before you can pay yourself a salary. You’ll be able to pay yourself a salary up to a certain figure before you need to pay any tax on it. By remaining under the threshold for directors, you can avoid being charged NI. To find out the current threshold for directors, click here.
Once you start generating profits, you will need to pay Corporation Tax on them. Once the tax has been paid, you can pay the rest to shareholders as dividends. The amount that goes to each shareholder will depend on their share percentage holding in the company.
The dividend must be declared before anything is paid out, so a board meeting will be held with other directors of the company. Each dividend must be marked by a dividend voucher, which is given to each recipient. Thanks to your dividend allowance, you don’t need to pay any tax on the first £2,000 of your dividends.
Choose the right option when you pay yourself from a limited company
Many directors choose to take dividends because this is often more tax-efficient than opting for a salary. However, this is not always the case. Many people can benefit by opting for a blend of dividend and salary payments to maximise tax-efficiency. It is common for people to take a salary up to the NI threshold and receive the rest of their income as a dividend.
You can leave your dividends or some of them within the company if you wish. You may wish to spend them on extra resources or use them as part of your tax planning strategy. You can only receive dividend payments if you’re outside of IR35. If you’re categorised as being in IR35, you’ll only be able to take a salary. Accountants can help you remain compliant with tax regulations.
A director’s loan is money you receive from your company that’s not an expense payment, salary or dividend. It can’t be money that you loaned to the company yourself or paid into it. You must keep records of any director’s loans, and you may need to pay tax on them. It’s important to think carefully before taking out a director’s loan. This should mainly be used as a short-term finance option and you’ll need to meet specific criteria. Talk to us today if you need more advice on taking out a director’s loan.
Reimbursement of expenses
Expense claims shouldn’t be seen as a primary way of paying yourself, but you can claim back funds spent on certain purchases related to your business, even before it was incorporated. Your business will be able to claim tax relief on these expenses, and you can personally reimburse yourself. Most of these expenses are linked to the equipment you buy for your company, insurance and mileage but you can claim for anything you require to do business.
To find out more about accountancy and paying yourself from a limited company, talk to AO Accountants today. Use the form on our site, call 020 7164 6507 or send an email to firstname.lastname@example.org.