Once you’ve set up your company and started trading, the next step to think about is how you’re going to pay yourself. There are a few options here for you to choose from depending on your circumstances.

The first thing to remember that if you incorporate a company, it then becomes a separate entity to you. This means that all of the profit that comes through is not automatically going to go to you as the company will have its own separate liabilities. So paying yourself isn’t as simple as it might seem. Here are the main ways company owners pay themselves.

PAYE

This is a government managed scheme and stands for Pay as your Earn. This means that HMRC can collect income tax at the source, the employer. If you’ve been an employee in the past, this will be the same system they used to pay you and deduct tax from your wage.

If you choose this option you will have to decide on the gross amount of income you’d like to pay as your salary. Then you will have to calculate the amount of income tax and National Insurance that you owe and will deduct from this amount. After this you will have a net figure that you can take out of the company for your own salary.

If you’re using it to pay your employees, you will also have to make monthly returns to HMRC to maintain real time payroll figures.

Dividends

Dividends are payments made to company shareholders out of the company’s profits. You can’t give out dividends if you haven’t made a profit. They are typically paid out once or twice a year to shareholders who have invested in the company or are directors.

Dividends are first taxed through corporation tax that the company pays on profits. When they are divided among shareholders, this then raises a tax liability for individuals through income tax.

Tax paid on dividends is usually lower than income tax. It’s 7.5% for basic rate, higher is 32.5% and 38.1% is for additional rate payers. However, there is now a dividend allowance of £5000 that you can receive before you pay any tax on them.

Tax efficiency

You don’t want to unnecessarily pay more tax than you have to so tax efficiency is important. It’s worth bearing the personal allowance for income tax (£11,500) and the dividend allowance (£5,000) in mind when deciding how to pay yourself.

A common way to remain tax efficient is to only pay a small salary through PAYE and then take the rest out as dividends. This is because you’ll probably be taxed more through income tax than through dividend tax.

However, this will depend on your individual circumstances. It’s always worth getting some advice from an accountant on the best way to manage your salary and company finances.

 

If you’d like to speak to one of our team for advice on director’s salary, you can call us on 020 3582 4457 for more information.

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