How should I pay myself?
Oh if only I had a £1 for every time I was asked this question!
It is understandable though. As a small business owner you, of course, want to be paying yourself in the most tax efficient way possible and because there are different allowances and 2022 has seen a new tax introduced (yey!) and some considerable changes it can feel really daunting and confusing.
In this blog I break things down into (hopefully) simpler terms. I would always recommend speaking with someone (like me!) to talk through your specific requirements.
1) £9,100 salary (tax-efficient, no National Insurance (NI) admin)
At this salary level there is very little admin involved
There will be no income tax, Employers or Employee NI payable at all
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 / £6,396 per year)
2) £11,908 salary (slightly more tax-efficient, some NI admin)
This year this is the most tax efficient way to pay yourself if you are a sole director
There is a small tax advantage to taking a £11,908 salary compared to £9,100 of £191.21
You pay £422.60 in Employers NIC however this is tax deductible
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 (This is the most tax-efficient if you have 2+ employees)
You must claim employment allowance (EA) to benefit from this find out more about the EA and see a calculation here
The EA will refund any Employers’ NICs your company pays, up to a maximum of £5,000.
You can go back 4 years to claim on any EA you were entitled to
You will make a tax saving of £659.30 compared to the £9,100 salary above
So, what about Dividends?
Most business owners have heard of dividends but again they can cause some worry and confusion.
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:
8.75% (basic rate)
33.75% (higher rate)
39.35% (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.
Still not sure?
Everyone's situation is different and I pride myself on providing a personal service that works to meet your specific needs so ultimately your business adheres to it's tax obligations but also so you can enjoy the rewards you've worked so hard for.