Simple Business Guide #9 - How to pay yourself in the most tax efficient way
Many businesses start as sole traders, but there can be significant tax savings to be made if you run your business through a Limited Company instead. There are other considerations as well so it's worth checking out our guide to choosing the best business structure.
How much should you pay yourself?
The optimum amount to pay yourself as a director of your own Limited Company changes each tax year, and it also changes depending on your own personal situation and how much other income you have. This article is based on tax year 2011/12 and assumes that the director has no other income. It is also important to remember that this assumes that the director does not have an employment contract with the company which details his working hours. If he does have such a contract then minimum wage requirements would apply.
Paying a monthly salary of £589 avoids both the company and the director from paying any PAYE or National Insurance. At this level you also protect your entitlement to receive state benefits, basic state pension etc as you receive a notional NI credit from HMRC. This amount can be slightly increased to £602 per month at which level the company will pay a small amount of NI, but the director will still pay no PAYE or NI.
The rest should be paid as a dividend and a director can pay a further net dividend of £31,866 before paying additional income tax. Above this level income tax would be payable on any further dividends. Remember though that dividends can only be paid out of the profit the company makes after paying corporation tax, so it is important to track how much profit you are making so that you don't pay yourself too much dividend.
To summarise, on an annual basis you can pay yourself the following amounts without having to pay Income Tax or NI:
- salary of £589 per month = £7,068 per year
- net dividends from the company of £31,866
- Total Income £38,934
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If you would like to discuss anything in this article, or need some help getting your business off the ground, or taking it to the next level, then please feel free to contact us. Don't forget - the first consultation is FREE.
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