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As a director of a Limited Company your finances are legally separate from your business. Due to this the profits you make are not classed as your own in the way that they are if you were a Sole Trader.
When you’re a director of a business you need to decide on the best way to pay yourself in the most tax efficient way possible. We usually advise our clients who are directors to take a low salary accompanied by dividends.
National Insurance
Technically this means you're an employee of the company but you’re also the employer too. As an employee your salary will be subject to National Insurance (NI) contributions and income tax. Whereas your dividends will not be treated the same. Taking a salary from the business is important so that you have a steady income throughout the year and to be sure that you’re making NI payments to contribute towards your state pension. What you’ve got to take into consideration is that you as an employer will also have to make the NI contributions too.
Last year the threshold for National insurance was changed to be inline with that of income tax and it’s now set at £12,570 and has been frozen until April 2028. So once you start earning this amount you will need to make National Insurance Contributions as an employee and an employer. The amount you pay as an employee is the primary threshold and the amount you pay as an employer is the secondary threshold.
Here are the rates you should be aware of:
Income Tax
As a director you are entitled to take a salary which is less than the minimum wage if you so wish. You may ask, why would you want to pay yourself so little? But there are advantages to doing this.
Taking a salary which is above the lower earnings limit £6,396 means you will qualify for contributions towards your state pension. If you choose to take a salary between the lower limit and the primary threshold £12,570 then you will be eligible for the contributions towards your pension without you or you as an employer having to actually pay National Insurance or income tax.
Here are this year's thresholds.
Tax on Dividends
If you choose to take a lower salary you can then boost it by taking Dividends from the business. Dividends are not subject to National Insurance but they are subject to tax. This threshold is not the same as the above personal tax threshold.
Last year you were allowed to take £2,000 from the business without having to pay tax. This has now been reduced to £1,000 and next year it will be reduced further to £500.
The rate for dividend tax is much lower than personal tax, see the table below.
Remember that employee expenses are an allowable expense. So the more you pay yourself the less corporation tax you will pay.
You may also be eligible for employment allowance. This means you could claim up to £5,000 to cover the cost of employers national insurance. In order to be eligible for this you must have at least 1 employee or 2 directors on the payroll and not be a director of another company that’s claiming it already.
It can of course be quite confusing when it comes to knowing what salary you should take from your limited company and we are here to help.
Get in touch today to discuss your requirements.
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