Limited Company: how much salary should you take?

Running your own Limited Company gives you more control over your personal income, particularly when it comes to how and when you pay yourself. This allows you to organise your personal payment in a more tax-efficient manner by paying yourself a director's salary through PAYE and collecting shareholder dividends at regular intervals, or whenever business earnings permit.

Why should you take a salary?
As a limited business owner, there are several reasons why you should take a salary.

However, there are two primary reasons why you, as a limited company director, should receive a salary from the business:

It's an allowed business cost, thus it decreases the amount of Corporation Tax your firm has to pay;
If your income is higher than the Lower Earnings Limit (£6,240 in the 2020/21 and 2021/22 tax years – see current tax rates), you will accumulate qualifying years toward your state pension.

How much should you pay yourself as a Limited Company Director?
The aim is to maximise any personal allowances and tax-free choices while minimising Corporation Tax and legally avoiding other corporate responsibilities as much as feasible.

There is no limit to how much you may earn as a wage from your own business, but we will discuss the most tax-efficient way of paying yourself in the following:

Companies with more than one employee or many directors

Directors in enterprises with at least two workers can receive a £12,570 wage (PAYE) and claim the Employment Allowance (see below). This strategy avoids paying income taxes while also allowing the salary to be deducted from corporate profits, cutting the Corporation Tax obligation.

On both the individual and employer sides, there will be a minor amount of NIC to pay (due to the Personal Allowance threshold being higher than the NIC thresholds).

No additional staff except the sole director
The Employment Allowance cannot be claimed in businesses with a single director and no workers. As a result, for the 2021/22 tax year, the most tax-efficient method will be to take a salary up to the Primary Threshold of £9,568 per year. It should be noted that there will be some administrative work involved in the payment of a small portion of employers' NIC.

It is advised that you should take a salary up to the Secondary Threshold of £8,840 per year as this avoids NIC and the associated procedures, although it is somewhat less tax efficient.

Dividend payments

With this method, there are two possibilities. For instance, you may either reinvest your earnings in the business or take them out and distribute it to shareholders as a dividend.

The term "shareholder" simply means the business owner(s). You can pay yourself a dividend if you own and control your own corporation. Due to the lower personal tax rate on dividends, this might be a tax-efficient way to move money out of your firm.

You may maximise your tax efficiency by mixing dividend distributions with salary payments.

Tax implications
All salaries will be subject to taxation via Pay-as-you-earn, just like ordinary full-time workers (PAYE). With three different PAYE 'taxes,' the benefit of lowering your Corporation Tax burden by taking a higher income might quickly be overshadowed by the additional tax you pay. The three taxes that must be paid are as follows:

Income Tax

In a tax year, income tax is calculated on all work earnings and other sources of income. In a particular tax year, for example, if you've already earned £10,000 from any work, your tax-free Personal Allowance will be lowered by this amount.

Employer National Insurance contributions

Employer NICs are subject to the same threshold as workers. Employers must pay 13.8% NICs for every dollar their employee makes above the weekly National Insurance earnings level. This also applies to your own director's remuneration, and the corporation must pay additional PAYE tax.

Employee National Insurance contributions

Employee National Insurance Contributions are not cumulative, unlike Income Tax. This implies that before NICs are due, each new job has its own earnings threshold. There is a maximum amount of NICs that can be paid by employees who are Higher Rate taxpayers.

This level is established as a monthly amount if you're an employee (but not a director). Even if your income for the remainder of the year is decreased, you'll have to pay NICs if you're paid more than this amount in any given month.

Income Tax and National Insurance are normally paid to HMRC (HM Revenue & Customs) on a quarterly basis as a limited company contractor. Furthermore, with the implementation of Real Time Information (RTI), you will be required to provide specific information to HMRC each time you or another employee is paid.

You may be subject to a fine or an increase in your tax bill if you fail to pay these taxes on time. It's also worth noting that you're not required to pay yourself the National Minimum Wage unless you have a contract of employment in place.

Owning a business and being a limited company director entails a slew of obligations, and running a firm may be very difficult for many, especially in these tumultuous times. Persona Finance recognises these challenges, which is why we strive to make your business needs as simple as possible by providing you with the most essential accounting services.

For more information on our services, please contact Persona Finance at [enquiries@personafinance.co.uk].