Setting Your Limited Company Payroll: Factors to Consider
Now self-assessment season is over, it’s time to plan how you’ll run your limited company in the year to come, and there are some important decisions to make. For example, you’ll need to decide what combination of salary and dividends you’ll use to take money out of your company. In this article, we’ll look at some of the factors you might want to consider.
Your IR35 status
If you are Inside IR35 you should not take any income as dividends. If you are Outside IR35 you’re free to set your own salary and dividend strategy, depending on your circumstances and goals. Your status will usually be decided by your end client, unless they class as a small private company, in which case it's up to you to determine it yourself.
Setting your salary
The cost of your salary is deductible from the company’s Corporation Tax bill, so your company will save 19% (2023/2024) of whatever salary it pays you. What strategy you choose for your salary will depend on your circumstances.
The lower earnings limit (National Insurance)
If your salary is above the lower earnings limit of £6,396, (2023/2024) you’ll receive a credit for National Insurance contributions, but you won’t personally pay any NICs until you reach the primary threshold of £12,570 (2023/2024). Your entitlement to state pension and certain other benefits is dependent on your NICs, so it could be worth setting your salary above the lower earnings limit.
The primary threshold (National Insurance)
This is the point at which you’ll start to pay NICs at 12% which is deducted from your gross salary. In tax year 2023/2024 the primary threshold is £12,570.
The secondary threshold (National Insurance)
This is the point at which an employer starts to pay NIC on their employees salary, this is paid separately to the employee NIC and tax and does not affect the gross or net salary calculations. In the tax year 2023/2024 the secondary threshold is £9,100, salary in excess of this amount will create NIC payable at 13.8%.
If your company has more than one employee, it can claim a refund of any employer’s national insurance paid up to a maximum of £5,000, through Employment Allowance. If this applies to you, it could mean you’re better off setting your salary above the primary threshold.
Personal Allowance (Income Tax)
If you’re entitled to the full personal allowance, you’ll start paying the basic rate of 20% income tax when your salary reaches £12,571 (2023/2024). However, there are still some circumstances where you might want to set your salary over this threshold.
The annual maximum tax-free pension contribution is set at £40,000, but it’s limited to your Net Relevant Earnings (NRE) which excludes dividend income. If retirement planning is important to you, this might affect your salary/dividend strategy.
Minimum salary required
Some contractors have a minimum salary that they must be paid, either to satisfy visa requirements or for a mortgage or other credit application. If this applies to you it will obviously affect your strategy. However, if you’re only taking a higher salary to support a mortgage application, it might be worth using a specialist broker like CMME (Contractor Mortgages Made Easy), who could base the application on your contract rate rather than your salary.
If you have income from elsewhere, for example if you have income from rental properties or investments this should be taken into account in your planning. Please make sure your accountant is aware of all your income so they can advise you correctly.
Planning your dividends
If your limited company has made a profit, after paying your salary, all expenses, liabilities and outstanding taxes, it can distribute these funds to shareholders as dividends.
Dividends are a tax efficient way to take money out of your company, as they don’t attract National Insurance contributions like salary does. They must be distributed according to the percentage of share ownership; for example, if you own 50% of the shares in your company, you’ll receive half of each dividend it pays.
How dividends are taxed
The first £1,000 (2023/24) of dividend income will be free of income tax. Above this allowance, the rate you pay will depend on your overall income and which Income Tax bands the “top slice” falls into. Your dividends might be taxed at more than one rate.
If you’re with Orange Genie Accountancy
If you’re with Orange Genie Accountancy already, your dedicated accountant will be well acquainted with your company and your circumstances and will be keen to discuss your strategy with you. If you have any questions, please contact your accountant.
If you’re not with us yet but you have questions about this issue, or if we can help in any way, please contact our expert team on 01296 468 483 or email firstname.lastname@example.org