How much should I pay myself from my limited company?
If you’re just starting out with your own limited company or changing from self-employed to having your own limited company, working out how you’re going to pay yourself is important, as you’ve got 2 choices, dividends and a salary, with a combination of the two being the most tax efficient way.
If you’re going to take a salary you’ll need a payroll – we’d highly recommend getting us to process this for you, a director payroll doesn’t cost much and means we’ll take care of all the reporting requirements under HMRC’s RTI (Real time information) rules to ensure you avoid penalties and fines. It’s also good if you take on employees further down the line for someone else to be managing it so you’ve not got to keep up on all the rules and regulations that go along with payroll. But you can equally run this yourself, using any one of HMRC’s approved payroll software packages.
Another good reason for taking a salary from your limited company is that, as long as it’s above the Lower Earnings Limit (LEL – which is £6,396 in 2023/24 tax year), you’ll get a qualifying year towards your state pension. The amount you take as a salary also lowers your corporation tax as it’s an allowed business expense.
Other National Insurance thresholds to be aware of are the Primary threshold – when you start paying employee’s National Insurance Contributions (NICs) and the Secondary threshold – when your company has to start paying employer’s NICs. For the current tax year (2023/24), if you have a salary under the secondary threshold of £9100 (which is the lower of the Primary & Secondary thresholds) then you’ll qualify for the pension year but not pay any NICs. This equates to £758.33 per month.
If you’ve got more than just yourself on the payroll you might be eligible for employment allowance, which essentially credits off the first £5000 of employers NICs, meaning you can go up to the Primary threshold of £12,570 per year, meaning a salary of £1047.50 per year.
This is all assuming you’ve got a standard tax code (currently 1257L) and therefore none of the above examples would be subject to tax.
However, there are reasons to pay yourself more. We of course hope to never be in the situation again where it’s relevant, but furlough payments during the COVID-19 pandemic were based on your salary, so a low salary means low furlough. You also might have reduced maternity benefits, reduced cover under various insurances that are based on salary and some loan/mortgage applications can look down on a low salary, even if you’ve got high dividends to go with it.
There’s other things to consider too, such as a new director would only get a part year allowance on the NICs or other jobs affecting your tax codes, so if you are unsure of what salary to go for then you might be best going for our director only payroll package.