How to Pay Yourself From A Limited Company
Setting up a limited company is a little more complex than registering as a sole-trader in many aspects – including paying yourself.
When you’re the operator or shareholder of a limited company, you’re considered a separate legal entity, which means you can’t take money from your business unless you adhere to specific regulations. This isn’t the same as being a sole trader, where yourself and your company are seen as the same entity, and you can pay yourself whenever (and however) you want.
This guide will look at your options for paying yourself from a limited company. Don’t worry – it’s easy once you’re clear on what to do. But if you still need some advice, maybe you should look at hiring one of our local Accountants to deal with this for you?
How Do I Pay Myself From A Limited Company?
There are three options for paying yourself from a limited company: taking a salary, taking money as dividends payments, or taking money as a director’s loan. These are discussed in more detail below.
Taking a Director’s Salary
As a limited company director, your first option is to register for HMRC’S PAYE (pay as you earn) system and pay yourself a regular salary. Your company must be registered with HMRC to have access to this option. Registering is easy to do and can be completed online. As an “employee” of your business, you will need to pay National Insurance and tax contributions if your salary crosses the personal allowance threshold.
It’s worth carefully considering how much salary should be paid to yourself and any other company directors or shareholders. You can find more information about tax and salary later in this article.
The benefits of receiving a salary from your limited company are:
- The money can be paid even if your business isn’t making a profit.
- You can make bigger contributions to your personal pension.
- It’s relatively easy to pay yourself a salary.
The drawbacks of a salary are as follows:
- Your income tax will be higher than if you’d paid yourself in dividends.
- Both you and your limited company will need to pay National Insurance.
Taking Dividends Payments
Alternatively, if you’re also a company shareholder, you can leave some of your salaried income in your business and take shares of the profits instead. These shares are known as dividend payments. The percentage of your ownership of the company will determine the money you receive from these dividends. The more significant percentage of your ownership, the greater portion of available profits you will receive.
If you’re your limited company’s sole shareholder, you’ll receive all the remaining income in dividends after any relevant costs and tax have been deducted.
Below are some of the benefits of getting paid in dividends:
- Your income tax will be lower on this form of payment.
- Neither employer’s nor employee’s NIC applies to dividends.
The drawbacks of receiving dividend handouts are:
- Shareholders can only receive dividends when the company is making a profit.
- Dividend handouts can be unpredictable.
Paying From a Director’s Loan
You can also take money from your limited company using a director’s loan account. You can use this method to lend your company money. You’re also entitled to take money from the company that exceeds the amount of money that you’ve paid into the business. Additionally, a director’s loan lets you take money back that you had already put into the business.
You must keep a clear record when you take money from your company in the form of a director’s loan. For this, you’ll need a director’s loan account in your business’s balance sheet.
Your director’s loan account will be overdrawn if you take more money from your company than you’ve paid into it. Be wary of doing this, as there may be tax implications. On the other hand, if you are owed money from your company, your director’s loan account will be in credit. You will be able to take money from your business at any point, and you won’t be hit with additional tax liabilities at the end of the tax year.
The advantages of directors’ loans are as follows:
- Can give you access to more money than you’re currently receiving.
- Ideal for covering short-term bills or one-off costs.
The drawbacks of directors’ loans are:
- Requires more financial admin.
- Can be tedious to keep on top of.
What Taxes Need to be Paid Under PAYE?
The salary you pay yourself under HMRC’s PAYE scheme will determine whether you need to pay tax or National Insurance contributions (NIC).
Your limited company will also pay these contributions to HMRC on a monthly or quarterly basis. Salary payments are classed as tax-deductible expenses, which means that the company itself won’t have any corporation tax liability on the money paid. With that said, if you earn more than the NIC Secondary Threshold of £8,840 (2021-22 tax year), your limited company will still need to pay Employers National Insurance Contributions (currently 13.8%) on your salary earnings.
If you want to be more tax-efficient, you can do what many company directors do and pay yourself a salary up to the NIC Primary Threshold. This means you won’t have to pay National Insurance Contributions or income tax. You’ll still qualify for benefit entitlements and the State Pension if you earn more than the Lower Earnings Limit (currently £6,240/year).
An alternative option, which is still relatively tax-efficient, is to pay yourself a slightly higher salary of up to £12,570 – the current annual tax-free personal allowance. Paying yourself more than this will mean that you cross the personal allowance threshold, and you’ll be taxed on the money you earn above this. You’d still have to pay 12% Class 1 National Insurance on any earnings above £9,568, but you wouldn’t be taxed on this money from your company.
Wondering how you can pay yourself a bigger salary and be more tax-efficient? The solution is to pay yourself a combination of a salary through PAYE and dividends. Dividends are taxed as follows: 7.5% (basic rate) 32.5% (higher rate) 38.1% (additional rate). The first £2,000 of dividends are income tax-free.
How Much Tax Do I Pay if I Own a Limited Company?
Currently, limited companies in the UK have to pay 19% corporation tax. This comes out of the company’s total profits, minus any allowable expenses. As a limited company, you’re not required to pay income tax or National insurance (though you will need to pay these yourself – see above).
The profit you’ve made in a tax year will determine the exact amount of tax your limited company pays. So, for instance, a limited company that earns £120,000, with expenses that add up to £20,000, will have a £100,000 profit. 19% of 100,000 is £19,000 – so that’s what your company would owe in taxes.
Keep in mind that tax rates for limited companies are often changing. If you’re struggling to keep up with what your tax liabilities are, you may want to outsource your accounting to a professional or at least invest in a tax accounting software that will help you better understand your obligations.
It’s also important to understand whether your limited company will need to pay tax on dividends.
If your limited company has made a profit, once corporation tax and business expenses have been paid, these earnings can be distributed to the business’ shareholders in the form of dividends. Dividend payments can only be made when there is enough profit to pay them.
Your limited company isn’t required to pay tax on dividend payments. But if you, as a shareholder, receive dividend payments, you will need to pay income tax and national insurance accordingly. This will be outlined in your annual self-assessment tax return.
Claiming Expenses and Benefits from a Limited Company
To run your company the tax-efficient way, it’s highly recommended that you claim relevant benefits and expenses in your company tax return. This should reduce the overall corporation tax your business has to pay.
If your business expenses go unclaimed, you may end up paying more tax than you should. If you’re making enough profit, it’s impossible to run your limited company completely tax-free. However, being savvy with your company expenses will help you to be as tax-efficient as possible.
Just a few of the costs that limited business directors may be able to claim tax back on are as follows:
- Accommodation and business travel costs
- Accounting fees (monthly or annually)
- Bank/ credit card charges and interest
- Business insurance policies
- Company mileage expenses
- Vehicle insurance & related costs
- Charity donations from the company
- Certain company events
- Equipment costs
- Legal fees
- Pensions
- Salaries (company directors will pay personal tax on these)
- Training
- Office rental
All these costs need to be relevant to your business. So, for instance, trying to get tax back on personal travel costs is illegal. Directors and shareholders should never claim tax back on money spent on products or services solely intended for personal use. However, you may be able to claim on certain items that you use for business and personal purposes, such as your laptop.
If you’re unsure about what is classed as a business expense, it’s essential to seek professional advice. A registered accountant can work through your business bank statements and determine which costs you can claim tax back on. Even better, find an accounting firm that can manage your expenses as they come in.
Claiming benefits and expenses from your company’s profits will help you reduce your corporation tax liability, but remember, this is separate from your personal income tax.
Record Keeping of Expenses and Benefits
You won’t correctly account for your costs without keeping accurate records of everything in your company’s balance sheet. Under current laws, your company must keep its financial records for a minimum of six years.
It’s a good idea to have an expense form for your company. As the company director, you can ensure that any expenses are filed and collected at the end of each month.
HMRC’s rules on what is and isn’t classed as tax-deductible aren’t the most straightforward. Your expenses need to be “fair” and “reasonable” – two terms that may leave you scratching your head.
If you’re unsure what you can class as a business expense, or you just don’t want the hassle of record-keeping, it’s highly recommended that you find a qualified accountant who can manage your monthly accounts.
At Mazuma, you’ll be paired with a dedicated accountant who will manage your finances on your behalf. We can help you set up your business from the very start, even if you’re yet to be registered with HMRC. Our accountants can also help you to reduce your income tax through directors’ loans or paying some of your salary in the form of dividends.
