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Taking a Tax Efficient Salary From Your Limited Company

If you’re contracting through your own Limited company, you’ll need to decide how much salary, if any, you’re going to take. You’ll need to make this decision separately each tax year, and there are a number of factors that might affect your choice. In this article we’ll look at why you might choose to take a salary, and which factors you might need to consider.

How are you taxed as a Limited company contractor?

Assuming you’re outside IR35, you can decide to take payments from your company as a combination of salary and dividends.

Your company pays Corporation Tax on its profits and Employers National Insurance Contributions (NICs) on your salary.

You pay income tax and Employee NICs on your salary, and income tax on your dividends.

With proper advice from a contractor accountant, you can set your salary and dividend strategy to minimise this tax liability. Your exact strategy will depend on your circumstances and goals, taking a number of factors into account.

Reasons to take a salary from your Limited company

From a tax planning point of view, there are two reasons why you might want to take a salary from your company.

  • Your salary is a legitimate business expense, which means it reduces the amount of Corporation Tax you pay.

  • If your salary is over the Lower Earnings Limit you accumulate qualifying years towards your state pension, and your eligibility for certain state benefits.

Deciding your salary/dividend strategy

Depending on your priorities, you may set your salary at one of several thresholds. Assuming you have no income from elsewhere, the thresholds to consider are:

Salary amount

Tax/benefit consequences

Less than the lower earnings limit (£6,396 in tax year 2022/23)

No state pension or benefit contribution

No NICs payable

No income tax payable

Above the lower earnings limit, below the primary NI threshold (£6,397 - £9,100 in 2022/23)

Pension and state benefit contribution

No NICs payable

No income tax payable

Above the primary NI threshold, less than personal allowance (£9,101 - £12,570 in 2022/23)

State benefit contribution

NICs are payable

No income tax payable

More than personal allowance, inside the basic rate threshold (£12,571 -£50,270 in 2022/23)

State benefit contribution

NICs are payable

Basic rate income tax is payable

Inside the higher rate threshold

State benefit contribution

NICs are payable

Higher rate income tax is payable

Depending on your strategy you can set your salary at the most appropriate threshold and take the remainder of your income as dividends. Dividends don’t attract NICs, and they attract income tax depending on the band they fall into, after an allowance of £2,000 (2022/23):

Tax band

Tax rate on dividends

Basic rate

8.75%

Higher rate

33.75%

Additional rate

39.35%

The most common strategy is to set salary above the lower earnings limit and below the secondary threshold, so you qualify for pension and state benefit contributions but don’t have to pay NICs or income tax or employers NIC. However, depending on your circumstances there may be good reasons to set your salary higher than this. These could include:

  • Compliance with National Minimum Wage legislation

  • Eligibility for maternity benefits

  • Insurance cover for your income where payments would be based on your salary

  • Eligibility criteria for a loan or mortgage

  • Making full use of your personal allowance

External income

If you have external income, for example from a rental property or other investments, this may affect your salary decision. For example, instead of taking £12,570 (to use all your personal allowance) because you have rental income of £3,470, you could take £9,100 to still get a qualifying year towards state pension and the rental income is covered by your personal allowance.

To ensure all relevant factors are considered, we advise you to discuss your specific situation with your specialist contractor accountant before making your decision.

If you’re a client of Orange Genie Accountancy

If you’re already with Orange Genie Accountancy, your accountant will have discussed your salary options with you, and you will have received an email asking you to confirm the amount you would like to pay yourself. If you have not already, please confirm using this link. Your payroll will be run on the 6th of the month. You can withdraw your salary on or after the date on your payslip. Salary owed can be found in FreeAgent under the My Money tab showing along the top bar of your FreeAgent portal.

If you’re not with us yet and have questions about this issue, or if we can help in any way, please contact our expert team on 01296 468 483 or email info@orangegenie.com.

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