What is the most tax efficient way to take income as a sole director or shareholder?
If you are the only director and shareholder of a limited company, it’s usually more efficient to take a small salary up to the National Insurance (NI) threshold, and then take the remainder as a dividend.
The salary that you process will be an expense to the limited company (and therefore reduce your corporation tax bill) but it will be tax and NI free to you personally. If this is your sole source of income, this is a great way to utilise your allowances.
You may be wondering why it’s best to take up to the NI threshold rather than the Personal Allowance threshold.
The reason is that as a sole director you are not entitled to the employer’s NI allowance, meaning that you would pay employee’s NI and employer’s NI on your income above the NI threshold, which is more than you save in corporation tax.
What if there is more than one director or shareholder?
If you are running a company with an equal business partner or spouse then the same arrangement can be applied i.e. a small salary with the remainder of withdrawals being taken as dividends.
An additional director does mean your company (as long as it’s not a connected company) has the benefit of eligibility for the employer’s NI allowance.
This means the directors can run a salary up to the Personal Allowance threshold rather than the NI threshold, therefore saving more tax.
If you have multiple directors and shareholders with different ownership percentages, then the above arrangements will likely not be feasible.
In this instance it’s usually better to pay the directors a full salary in relation to the work they carry out and for the shareholders to receive dividends at agreed intervals in time. Although not as tax efficient, everyone is then paid fairly.
What if I have other income?
If you have other income during a tax year then running a director’s salary may not be tax efficient for you. If the other income has breached the thresholds, it may be better to just take dividends from your company to avoid the NI.
If the other income is below the thresholds, then the difference can be calculated and put through as salary to fully utilise your allowances.
I don’t pay any NI, what about my pension contributions?
As long as payroll is being run for you and it’s over the lower threshold, then deemed NI contributions are made on your behalf which count towards your state pension and other benefits.
What if my salary is less than minimum wage?
The minimum wage only applies to employees and does not affect directors. As a director of a company you can pay yourself as little or as much as you like without having to worry about these restrictions.
Talk to one of our advisors to learn more about our online accountancy services for limited companies and directors, by calling 020 3355 4047.
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MAAT and ICPA accountant, with a passion for making accountancy and bookkeeping accessible. Other interests include cloud-based software development for web and mobile access, keeping fit, reading, and entrepreneurship.