How Do You Pay Yourself with a Limited Company?

When you run a limited company in the UK, deciding how to pay yourself is a crucial part of managing your business finances. As a limited company owner, you can take income in several ways, and choosing the most tax-efficient method is key to maximising your earnings. Here’s a comprehensive guide on how to pay yourself with a limited company.

Main Ways to Pay Yourself

1. Salary:
   • As a director of your limited company, you can pay yourself a salary through the company’s payroll system.
   • Salaries are subject to income tax and National Insurance Contributions (NICs).
   • Many directors choose to pay themselves a salary up to the personal allowance limit (£12,570 for the 2023/24 tax year) to minimise tax and NICs while remaining eligible for state benefits like the State Pension.
2. Dividends:
   • Dividends are payments made to shareholders from the company’s post-tax profits.
   • They are taxed at a lower rate than salary and are not subject to NICs, making them a tax-efficient way to take income.
   • You must ensure the company has sufficient post-tax profits before declaring dividends.
3. Director’s Loan:
   • You can withdraw money as a director’s loan, but this must be repaid within nine months and one day of the company’s financial year-end to avoid additional tax charges.

Combining Salary and Dividends

The most common approach for limited company owners is to take a combination of salary and dividends. Here’s why:

• Tax Efficiency: By keeping your salary within the personal allowance and taking additional income as dividends, you can minimize tax and NICs.
• Corporation Tax Savings: A salary is a business expense, reducing the company’s Corporation Tax liability.

Key Steps to Pay Yourself

1. Set Up a PAYE Scheme:
   • If you plan to pay yourself a salary, your company must register with HM Revenue & Customs (HMRC) for PAYE.
   • You will need to submit monthly payroll reports to HMRC.
2. Declare Dividends:
   • Ensure the company has sufficient profits after paying Corporation Tax.
   • Hold a directors’ meeting to formally declare the dividend, even if you are the sole director and shareholder.
   • Issue a dividend voucher to document the payment.
3. Maintain Accurate Records:
   • Keep detailed records of all salary and dividend payments, as well as any director’s loans.
   • This will ensure compliance with HMRC regulations and make tax filing easier.

Tax Implications

1. Salary Taxation:
   • Salaries are subject to income tax and NICs. Your company must deduct these from your gross salary and pay them to HMRC.
2. Dividend Taxation:
   • Dividends are taxed at different rates depending on your income tax band:
     • Basic Rate: 8.75%
     • Higher Rate: 33.75%
     • Additional Rate: 39.35%
   • The first £1,000 of dividends is tax-free for the 2023/24 tax year.
3. Director’s Loan Taxation:
   • Loans not repaid within the specified time frame may be subject to an additional Corporation Tax charge of 32.5%.

Final Thoughts

Paying yourself through a limited company offers flexibility and tax efficiency, but it requires careful planning to ensure compliance with UK tax laws.

Related Reading

How To Set Up A limited Company 

Does a Limited Company Have to Pay a Minimum Salary to the Directors?