We often get asked by directors of limited companies how they can pay themselves from their limited company.
All too often they are taking a ‘normal’ salary and then some dividends which means overall they are typically paying too much tax.
As a director of a limited company you take the risks and the sleepless nights that go hand in hand with running your own business so you need to make sure that you reward yourself properly and don’t give more away than you need to HMRC.
There are a number of way you can do this:
- Reimbursement of expenses
How should you pay yourself monthly?
You can take a salary of up to £12,500 without paying any tax as this is the personal allowance set by HMRC (2020/21). Everyone receives this allowance ( unless you earn over £100,000 at which point it tapers away) and it can be used against taxable income.
If you choose to take salary at this level you will incur some PAYE and National Insurance deductions. It is more tax efficient to take a lower salary that doesn’t trigger any deductions. This does still mean you qualify for National Insurance Class 2 and therefore keep your state pension intact. The lower salary level that most directors take is £8,784 (2020/21).
If you need say £2,000 per month to live on, pay bills etc, then £732 a month will come from your payroll. So how do you take the rest?
The rest of the monthly drawdown can be taken by way of a dividend from the profits of the company.
How do I take dividends?
Providing the company makes a profit it will have to pay Corporation Tax at 19%. Once this has been paid anything left is available to distribute as a dividend.
Dividends can be taken at any point during the year, or as a lump sum at the year end, providing there is enough profit to do so. You will need to hold a meeting to vote the dividend and keep the minutes of the meeting. You also need to provide a certificate to all the shareholders to confirm the dividend. This dividend is then declared on your personal tax return.
Anything that you have paid personally which is wholly and exclusively for use in the business can be reclaimed as an expense. This includes business miles that you have done in your own car (not a company owned car), a mobile phone you use solely for the business but had to take out in your personal name, and any initial set up costs e.g. maybe you needed some new office furniture to get you started. Keep all your records and receipts and these can be reclaimed by the busines either bit by bit during the year or at the year end in one lump sum.
If you need advice on how to pay yourself properly, or for any other help needed when operating your limited company call on 01937 584188 or email us at firstname.lastname@example.org. We are happy to book some time to chat to you about how we can help.