In order to ensure your limited company runs as smoothly and effectively as possible, you need to be detailed and process-orientated. You need to busy yourself with the day-to-day running of your company, including obtaining contracts, managing accounts and finding suppliers.
In the face of all this hard work, you may assume that paying yourself and enjoying the fruits of your labour to be an uncomplicated, pain-free process. In reality, however, there are certain decisions to be deliberated over before you can find a payment model that makes the most out of today’s tax regulations.
Directors of a limited company have a degree of flexibility when it comes to paying their own salaries. Most contractors choose to receive their income in the form of both dividends and salary.
Dividends and salary
Paying yourself through a combination of dividends and salary is a careful balancing act. Most contractors tend to pay themselves using a mixture of dividends and salary, opting to keep the salary low in order to minimise the amount of NIC contributions to be paid, as dividends do not qualify for National Insurance.
In order to ensure you get the best return, these two types of income must be carefully split and considered in terms of other factors, such a pension requirements. Given the changing legislation regarding dividends and the multiple factors that need to be considered, it is best to entrust this duty to a qualified accountant. This professional will be able to make recommendations and help with your tax planning to ensure that you make the most out of your business.
Factors to consider
There are a number of things to consider and remember when it comes to salary. Thorough research and an up-to-date knowledge on the law and regulations serve to benefit you and maximise your incomings:
- It is important to note that if you are entitled to the full personal allowance, you will not pay any income tax until you cross the threshold, which for 2016/2017 is £11,000.
- A low salary may mean lower-income tax and NICs, but it also means higher Corporation Tax.
- You can only take dividends out of your post-Corporation Tax profits.
- If your work is caught by IR35, then you will not be able to receive dividends. Your contractor/client relationship will be considered to be an employee/employer relationship and you will have to pay full employee and employer NICs on the whole of your income.
- You should make the most out of your tax-deductible expenses.
- Take the time to consider what you will do with any funds left over in the company’s bank account at year-end.
Decisions regarding something as seemingly simple as salary might seem overwhelming, especially in the light of other pressing duties required to keep your business afloat. For peace of mind, seek expert advice. Every company is different and requires a tailored solution that provides the best possible return for your work.