If you are a director of a limited company, you’ve probably realised by now there are a few different ways to make money out of your business. The two main choices you have are either through paying yourself through dividends or through paying yourself a salary. However, you need to be choosing a tax-efficient salary so that you’re not paying more income tax than you need to.
There are also a few reasons why you should be taking a salary from your limited company rather than just solely paying yourself through dividends.
One of the main reasons is that it is classed as an allowable business expense and therefore it means it lowers the overall amount of corporation tax that your limited company is going to be paying.
Another key reason is that if the salary you’re planning on paying yourself is above the lower-earnings limit (currently set at £6,240) you will then start to accrue qualifying years towards your state pension.
You may have been under the impression that it’s better to take a large salary. After all, you’re a director of your own company and if it is doing well you may want to pay yourself well. However, choosing a lower salary is much more tax-efficient. Paying yourself a low salary can mean that you don’t have to pay any income tax or national insurance contributions as you’re not classed as being liable to national minimum wage regulations as HMRC classes you as ‘office holders’.
However, it is important to note that taking a lower salary does have its disadvantages. These include reduced maternity benefits, missing out on your annual tax-free personal allowance, and also reduced cover on issues such as health, critical illness and similar policies.
And finally, as we touched upon at the start, you also have the option of paying yourself through dividends from your limited company which would also require the approval of any other directors in the company in question.
If you run your own limited company and want a chat on how is best to pay yourself from your company, get in touch with a member of our team. Here at D&K Accounting, we are a team of Profit First professionals with experience in helping businesses across the UK understand their finances.