What are the Best Ways to Take Salary from my Limited Company?

23 people online!
November 5th 2024
Tax Week 31
try our free mobile apps!

What are the Best Ways to Take Salary from my Limited Company?

A limited company opens up many methods of paying yourself. If you opt to take a salary, how much should you take and what other methods are there?

We have developed a number of tools to help answer this question. This guide includes an overview of the methods used.

In the context of the director - when a limited company makes a profit, the amount leftover can be either taken entirely as a dividend or a mixture of salary and dividends.

Dividends can be distributed only after corporation taxes have been paid, however salary can be taken from PRE-tax profit. This means any salary taken will reduce the corporation tax bill the company incurs.

Corporation tax does not have a tax-free allowance, and no bands (at the moment - 2019!). It is charged at 19% of the entire profit declared. So any salary amount taken will reduce the corporation tax bill by 19% of the amount taken.

Another reason for taking a salary is that if the director is paying the majority of their income in dividends, a salary above the lower earnings limit will earn them national insurance qualifying years for their eventual state pension.

The level of the salary taken is a balance between utilising the entirety of the tax-free allowance, or avoiding both tax and national insurance on the salary.

To avoid paying any national insurance AND tax you would take a salary below the primary threshold. This is currently about £4,000 less than the personal allowance. Another factor is that BOTH company and employee are liable to pay national insurance contributions of the salary.

Dividends are taxed after their own £2,000 tax-free band, and then at lower rates than regular income tax starting at just 7.5%. You don't have to declare the entire profit declared as a dividend, opting to retain it in the company for another year.

These scenarios are covered by our dividend vs salary calculator.

The calculator cannot cover more non-quantitative factors for why you may want a higher salary. If there is a contract of employment between your company and you then taking a very low salary for regular working hours may break minimum wage regulations. In addition, a low salary may negatively impact external insurances that are based on salary.

Advertisement
Advertisement
Jump to topic:

Help - find relevant tax tools and calculators - go back to top

Answer a few questions below and we will list relevant tax calculators and tools that can help you organise, budget and ultimately save you money!
are you an employee?