How to pay yourself from a limited company

How do you pay yourself as director of a limited company? You may be pleased to learn that the method – and to an extent the amount – are up to you.

Let’s look at some of the finer details on how directors get paid.

Paying yourself from a limited company

While a sole trader can simply dip into their bank account any time they wish to spend their profits, a limited company director must follow certain rules when it comes to drawing money from their company. This is because the company is considered legally separate from them.

There are broadly two options when it comes to paying yourself as a director of a limited company, although directors can choose both:

• A salary
• Through dividends

Paying yourself a salary from your limited company

Employee salaries in the UK are liable for income tax of between 20% and 45%, as well as National Insurance Contributions (NICs) above a certain threshold.

While many directors choose to pay themselves a PAYE salary, to save on income tax and NIs, they keep it at a nominal level so as not to exceed the tax and NIC-free thresholds.

As Director, so long as your yearly salary doesn’t exceed your annual tax-free Personal Allowance (£12,570 for the 2022/23 tax year), the salary won’t be liable for income tax.

Further, so long as it’s also below the National Insurance primary threshold (which will be £12,570 from July 2022), you won’t need to pay employee’s NIC’s on it either.

There’s also the secondary National Insurance threshold to consider of £9,100 annually for 2022/23 – your salary as director would need to be below this to be exempt from paying employer NIC’s.

So long as your director’s salary is below the income tax and NIC thresholds but still above the Lower Earnings Limit – just £6,396 annually for the 2022/23 tax year – then you’d still qualify for benefits like the State Pension.

Further, a director’s salary is counted as an allowable business expense, along with the other employee salaries, and can be subtracted before the company’s taxable profit is calculated.

Paying yourself dividends from your limited company

If you’re both a director and a shareholder, then you can pay yourself in dividends either instead of, or in addition to, taking a salary.

A dividend is basically a release of some of the business’s profits to the shareholders. Provided the conditions are met, a dividend can be released at any time throughout the tax year.

However, it must only be done after the company’s other financial obligations are met. To issue a dividend, it must be agreed at a minuted ‘director’s meeting’ – even if you’re the only director!

To avoid paying yourself too much by dividend and risking leaving the company short, consult an accountant.

Dividends don’t incur any tax for the company to issue, although they count towards the recipient’s taxable profit to be declared on an annual Self-Assessment tax return.

Dividends are taxed at a lower rate than salaries, and NIC’s do not apply, making them the main payment method of choice for most directors. For the 2022/23 tax year, the basic rate tax on dividends is 8.75%. Directors are also entitled to a £2,000 tax-free dividend allowance, which is in addition to the £12,570 tax-free personal allowance.

The Bottom Line

Many directors choose a salary dividends strategy which enables them to take advantage of the benefits of receiving a low salary (such as continuing entitlement to state benefits e.g., State Pension), as well as benefitting from the low tax obligations on dividend payments.

Accounting for limited companies can get a little complex, so it’s always best to receive guidance from an expert. If you’re looking for more support with your limited company accounting, get in touch today and a member of our expert team will be on hand to answer any questions.