Director’s Salary – How Much Should I Pay Myself?
As a director/owner it is sometimes difficult to decide the best split between salary and dividends. There really is no right or wrong answer but here are the rules to help you to decide.
| As a director you are legally separate from your limited company, even if you are also the owner. This means that the only way that you can take money from the company is if : – · You have already invested your own money into the company i.e. lent it to the company – you can take this back at any time tax-free · You pay yourself through payroll – this is taxed through PAYE and you may pay Tax and National Insurance Contributions (NICs) · You make enough profit during the year which allows you to take ‘dividends’ i.e. a distribution of profit which is taxable @ 8.75% (for the year 2023/2024 £1,000 is tax-free) but you do not pay NICs If you are a director, you are technically an employee of your own limited company and your limited company is your employer. Tax You as an employee will pay tax @ 20% on all earnings above £12,570 which equates to a tax-free salary of £1,047.50 per month. (This does not take into account any other earnings) Your limited company will not pay any tax as the tax liability is all yours. National Insurance There are two thresholds for NICs – the Primary Threshold and the Secondary Threshold. The Primary Threshold for 2023/2024 is £12,570– this is the point at which you as an employee begin to pay NICs @ 12% and your company WILL ALREADY be paying NICs @ 13.8% on this salary The Secondary Threshold for 2023/204 is £9,100– this is the point at which your company begins to pay NICs @ 13.8% on your salaryAs you can see, this means that on any earnings above £12,570 both you as an employee and your company as an employer will be paying NICs Lower Earnings Limit There is also a Lower Earnings Limit which for 2023/2024 is £6,396. Any income above this LEL means that qualifying years will be built up for your state pension. So wherever possible it is best to take a salary above this level to ensure that your pension entitlement is maximised. Please note that if your income falls below this amount then you can make Class 3 voluntary contributions which for the tax year 20233/2024 are £3.45/week – £179.40/year. This ensures that you do not have gaps in your state pension. |
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| Salary Taken | £12,570 | £9,100 |
| Employer’s NIC @13.8% | £479 | £0 |
| Employee’s NIC @ 12% | £0 | £0 |
| CorporationTax Benefit (based on 20%) | £694 | £0 |
| Tax incurred on dividends taken for difference @ 8.75% | £217 | £0 |
| Net Effect | £2 | £0 |
So What Should You Pay Yourself
Think about the table above.
As you can see the difference is negligible.
BEWARE!!
There is one small fly in the ointment – if your household bills amount to £30,000 per year and you are only taking £9,100 salary then HMRC CAN assess that the amount taken in dividends should, in fact, have been salary as you need this money to live day-to-day. I haven’t heard of many instances where this has actually happened but …………
