After investing your time and energy into setting up and running a limited company, it’s rewarding to see all that hard work pay off.
At the same time, starting to draw income from your company brings with it a new set of decisions to make – how should you access the money, how much should you take out, and how will it be taxed?
There are a few different ways you could pay yourself but your main options are taking a salary, or dividends. In many cases, the most suitable option is to take a combination of each.
When you’re deciding on the balance that works for you, you’ll need to think about your overall tax position, as well as the current rates and thresholds of income tax.
When you take a salary from your company, you’ll be taxed in the same way as an employee, through PAYE.
To do this, your company will have to operate a PAYE scheme and report the salary to HMRC, as well as paying employer’s national insurance contributions (NICs) at 13.8% on any portion of your salary over £8,424 per year.
If you take income as a salary in 2019/20, the following rates apply in England and Wales:
|Income||Tax rate||Employee’s NICs rate||Total effective rate|
|Up to £6,136||nil||nil||nil|
|Over £6,136 – £8,632||nil||0%||0%|
|Over £8,632 – £12,500||nil||12%||12%|
|Over £12,500 – £50,000||20%||12%||32%|
|Over £50,000 – £150,000||40%||2%||42%|
The nil-rate in the table indicates that no tax or national insurance is paid, while the 0% rate shows you are treated as if you had paid national insurance on your earnings.
This means if you are paying the 0% rate you can still receive national insurance credits that help you build up your entitlement to the state pension.
Further tax rules apply if your income exceeds £100,000, so talk to us if you’re in this position.
The tax-free allowance for dividends changed to £2,000 back in April 2018, and it remains the same for 2019/20.
Taking this allowance into account, the following rates apply for dividends this tax year:
|Up to £14,500*||nil|
|Over £14,500 – £50,000||7.5%|
|Over £50,000 – £150,000||32.5%|
|* This incorporates the £2,000 dividend allowance on top of the personal allowance in 2019/20.|
Getting the balance right
Many business owners choose to take a salary that’s above the lower earnings limit and below the primary threshold, before taking the rest of their income as dividends.
Doing so allows you to retain your entitlement to the state pension and other benefits, but it also means you won’t need to pay national insurance.
For 2019/20, this means a salary between £6,136 and £8,632.
Talk to us
Our tax advisers are at hand to help you get the most out of your company, and to decide on the right arrangement of salary and dividends for you.