As a director of my own limited company, how should I pay myself?

Assuming you’re working outside by IR35, your limited company will give you great deal of flexibility in how they take money out of you company, and indeed this is one of the reasons many contractors choose to incorporate. The most common advice is to take a small salary, combined with dividend payments. The advantage here is that dividends you don’t have to pay National Insurance Contributions on dividend income.

So why should I pay myself a salary?

Any salary you pay yourself will be deductible against your company’s corporation tax bill, so if you set your salary at the right level it can be very much worth your while. You set the level of your salary, so you can take as much or as little as you like. There are some things to consider when you’re setting your salary level, though.

The full personal allowance for tax year 2021/22 is £12,570, so assuming you’re entitled to the full allowance and you have no other income you’ll pay no income tax on a salary below this amount.

The threshold for National Insurance Contributions is £9,568 for both Employers and Employees national insurance.

For many contractors, this makes £9,568 the most tax efficient salary level, as this amount will be deductible from your company’s corporation tax without attracting income tax or NICs.

What if my company claims Employment Allowance?

Unless you’re the only director of a company with no other employees, or you’re working inside IR35, you might be able to claim Employment Allowance, which could make it advantageous to pay more of your income as a salary.

Employers Allowance refunds any Employers National Insurance paid by your company, up to a £4000 maximum, though Employees National Insurance will still be due.

How are dividends taxed?

The dividend allowance means you don’t pay any tax on the first £2000 of dividend income in the tax year. After the first £2000, the rate of tax you pay will depend on the tax band it falls into, after your salary and any other income is taken into account.

Basic rate: 7.5%

Higher rate: 32.8%

Additional rate: 38.1%

What else do I need to know about dividends?

Once your company has covered all its expenses and tax obligations, the remaining profit can be distributed to shareholders as dividends. Dividends must be paid in amounts matching the proportion of shares owned by each shareholder.

You can declare dividends as often as you like, but there must be enough profits in the company to do so, and the decision to make a dividend declaration must be recorded via board meeting minutes. Each shareholder must be provided with a dividend voucher, which can be electronic or on paper. Orange Genie Accountancy clients can do this quickly and easily through FreeAgent, our chosen web-based accountancy software. You’ll need the information from your dividend vouchers to complete your self-assessment tax return.