With the changes in how dividends are taxed, it is now more complicated than ever working out the most effective way to pay yourself as a director/shareholder of your own limited company.
Not only do you need to take into account how much tax you yourself will be paying, but also the impact it will have on your limited company’s tax liabilities.
The most common ways of being paid are:
- Salary
- Dividends
- Personal pension contributions.
There are other methods of being paid by your company but we will cover those in a later post.
Salary
It is a good idea to pay yourself at least the National Insurance threshold as a salary. This entitles you to certain state benefits including the state pension. For 2017/18 the National Insurance threshold is £8,164, which equates to a salary of £680.33 a month.
If you pay yourself more than this amount, then your company will need to pay National Insurance contributions to HMRC.
If you are the only person on the payroll then your company will not be entitled to the Employment Allowance, which is up to a £3,000 contribution from HMRC towards a company’s Employers National Insurance bill.
Cost to the director/shareholder | Cost to the company |
Salary of £8,164
There will be no cost to you. You will receive the full amount in salary.
|
Salary of £8,164
The company will pay you £8,164 in salary but will save corporation tax at 19% which equals £1,551. The net cost to the company is £6,613. |
Salary of £11,500 (the personal allowance for 2017/18)
You will incur Employees National Insurance contributions of £400. Your net salary will be £11,100
|
Salary of £11,500
The company will incur Employers National Insurance contributions of £460. The cost to the company will be: Salary: £11,500 However, the company will save corporation tax at 19% on this total which equals £2,272. The net cost to the company will be £9,688. |
Dividends
Dividends are payments made to shareholders out of a company’s profits after tax. This is the only method of payment that doesn’t result in a tax saving for the company.
For the 2017/18 tax year each shareholder can receive up to £5,000 in dividends without incurring any tax liability. The next £28,500 of dividends will be taxed at the dividend basic rate of 7.5% and anything over that will normally be taxed at the upper rate of 32.5%. There is an additional dividend rate of 38.1% but this only applies to dividends in excess of £150,000!
Dividends have to be declared on a self-assessment tax return and the tax paid by the shareholder out of his/her own funds.
The Government has changed the dividend rules with effect from 6th April 2018. From this date the dividend allowance will be reducing to £2,000 before tax is payable.
Personal pension contributions
The maximum amount that you can contribute to a personal pension plan, and on which you can receive tax relief, is 100% of your relevant earnings or £3,600, whichever is greater. This is capped at the available annual allowance, which is currently £40,000. Your salary counts as relevant earnings but dividends don’t.
The company can make these pension contributions directly into your pension scheme and they will be treated as a gross contribution.
Cost to director/shareholder | Cost to company |
The main cost to you is you will not be receiving the benefit of this money straight away and will have to wait until you can draw money from the scheme. | The pension contributions are tax deductible but the tax saving will only be available when the contributions are actually paid. |
Paying yourself from a limited company can be complicated, but with a little bit of forethought and planning, you should be able to minimise both the company’s and your own tax liabilities.
If you have any questions, or need any further advice, please get in touch.