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
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
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.
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
- Employer National Insurance contributions
- Employee National Insurance contributions
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 [firstname.lastname@example.org].