I am often asked how do I or how should I pay myself?

If you are a ltd company owner/director - Below are the most tax efficient ways you can start paying yourself, as with all things accounts related there are slight nuances and it is best to seek guidance from your accountant if unsure.

In 2021 there were very slight increases to each allowance:

 

1) £8,840 salary (tax-efficient, no NI admin)

  • For 2021/22, your personal allowance is £12,570 (Up £70 from last year).

  • For the 2021/22 tax year, your company only starts paying Employers’ National Insurance Contributions when your annual salary reaches £8,840. 

  • If your company is not claiming the Employment Allowance (see below), £8,840 is a tax-efficient salary to draw this year, with no National Insurance admin involved.

  • Make sure you take into account any other income you have already received in the current tax year (for example, if you received a salary from a previous job or have rental or savings income).

  • There is no legal requirement to pay yourself the National Minimum Wage unless you have a contract of employment with your own company which states otherwise (this is very unusual).

  • Please note: This salary level is above the Lower Earnings Limit for National Insurance required, in order to qualify for state benefits (the limit is the same as last year £120 per week / £6,240 per year).

2) £9,568 salary (slightly more tax-efficient, some NI admin)

  • There is a small tax advantage to taking a £9,568 salary compared to £8,740, only if you already have an accountant/payroll provider in place.

  • No Employees’ NICs or income tax is payable at this salary level.

  • However, Employers’ NICs at 13.8 % is payable on the additional salary (£9,568 – £8,840 = £728). £712 x 0.138 = £100.46.

  • Your company won’t have to pay Corporation Tax @ 19% on this additional salary, or the extra Employers’ NIC costs. So, the company is saving 0.19 x (£728 + £100.46) = £157.41

  • This gives an overall small saving to your company of £56.95 per year compared to £8,840.

  • There may be some admin costs associated with accounting for Employers’ NICs at this salary level; it depends on your own circumstances e.g. an established monthly accountant.

3) £12,570 salary (most tax-efficient, if you can claim the Employment Allowance)

If you do not fall into the IR35 remit here, and you have more than one employee that isn't a director, it may be tax-efficient to pay yourself a higher salary than £8,840 and claim the Employment Allowance (EA):

  • The EA will refund any Employers’ NICs your company pays, up to a maximum of £4,000. You must check with your accountant to see if your company is eligible (most contractor companies are not).

  • You can go back 4 years to claim on any EA you were entitled to.

  • If your company pays you £12,570, you will pay no income tax at all, the salary is deductible against your company’s Corporation Tax bill, and you’ll pay £360~ in Employees’ NICs.

  • The £512.26 Employers’ NICs will be refunded via the Employment Allowance (EA) scheme. However, you cannot claim the EA if you are the sole director of your company, and have no other employees.

  • Your company will also save in Corporation Tax if you decide to take a £12,570 salary instead of the £8,840 as salaries are a tax deductible expense. 

  • You will be around £345 better off per year as a result of the corporate and personal tax savings compared to the £8,840 salary level.

  • Overall, you are better off paying yourself a £12,570 salary during 2021/22, if your company is eligible to claim the EA.

  • You can find out more about the EA and see a calculation here.

Do you know about Dividends?

After you have decided upon the right salary level to pay yourself (and any employees) during the tax year, any remaining profits can be distributed to the company’s shareholders in the form of dividends, which are taxed as follows:

  • 7.5% (basic rate)

  • 32.5% (higher rate)

  • 38.1% (additional rate)

There is also a £2,000 dividend allowance which sits within your existing tax bands.

Dividends are taxed as the ‘top slice’ of income, so after you have taken into account your salary, and any other earnings and investment income.

Source: https://www.gov.uk/income-tax-rates - https://www.itcontracting.com/it-contractor-pay/ - https://www.gov.uk/corporation-tax-rates