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.

 

1) £8,788 salary (tax-efficient, no NI admin)

  • For 2020/21, your personal allowance is £12,500 (same as the previous year).

  • For the 2020/21 tax year, your company only starts paying Employers’ National Insurance Contributions when your annual salary reaches £8,788. 

  • If your company is not claiming the Employment Allowance (see below), £8,788 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 (this is £120 per week / £6,240 per year).

2) £9,500 salary (slightly more tax-efficient, some NI admin)

  • There is a small tax advantage to taking a £9,500 salary compared to £8,788, although you will need to account for National Insurance paperwork.

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

  • However, Employers’ NICs at 13.8 % is payable on the additional salary (£9,500 – £8,788 = £712). £712 x 0.138 = £98.26.

  • 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 (£712 + £98.26) = £153.95

  • This gives an overall small saving to your company of £55.69 per year compared to £8,788.

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

3) £12,500 salary (most tax-efficient, if you can claim the Employment Allowance)

If you do not fall into the IR35 remit here, and not the sole director/employee of your company earning over the Secondary Threshold, it may be tax-efficient to pay yourself a higher salary than £8,788 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 will still have to pay Employees’ NICs on any salary of over £9,500.

  • So, if your company pays you £12,500, 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 £705.28 in Corporation Tax if you decide to take a £12,500 salary instead of £8,788.

  • You will be around £345 better off per year as a result of the corporate and personal tax savings compared to the £8,788 salary level.

  • So, overall, you are better off paying yourself a £12,500 salary during 2020/21, if your company is eligible to claim the EA.

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

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

©2020 Small Business Accounting ltd - 1 Anzac House, Pillowell Road, Whitecroft, GL15 4RL - United Kingdom

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