Professional Accounting, tax and business advisors
As a Owner / Director of my own Limited Company, how much should you pay yourself as a salary and how much through dividends.
Why a Limited Company?
You're probably a Limited Company for 2 reasons;
a/ Tax efficiency
b/ For operating reasons as a business and shareholder interests.
So how do you extract money from the Company?
1/ If you incur expenses as a director but for the Company (e.g. Your car mileage), you can claim back expenses from the Company. This is a very tax efficient manner to get money out of your Limited Company.
2/ Salaries - I think you know this!
3/ Dividends - Yes - after profits are deduced for the Company, you are able to pay yourself a dividend based on the Articles of Association in the correct percentages (if there are other shareholders). If you earn a loss in the year you are considering to take a dividend, so long as the dividend you want to take is less than the Total Profits of the Company since the start of Company, you can take those dividends. (Obviously if there is enough cash in the Company Bank Account).
Soooo....How much should you pay yourself?
Assuming you are a majority shareholder of the business, you are only taxed on Income tax above £12,570 (Tax year 22-23). And if your income is over this value, you'll pay 20% Tax on your income over this value. This value is called your personal allowance. You can see the other tax bands here in case you want to extract much more than this as salary - https://www.gov.uk/income-tax-rates . If there is no reason why you want to pay yourself more money, so the maximum you should be paying yourself is £12,570 for the tax year 22-23. BUT!....
....this is not the only Tax you will pay - National Insurance is something that both you as a person and also the Company Pays but only if your salary is above a certain level. Just to make things a little complicated, National Insurance has its own bandings. National Insurance is important for many reasons, largest being the eligibility to qualify for a state pension at retirement age. There are 2 thresholds you should know about. The Lower Earnings level that you should definitely pay yourself and the Primary Threshold (the rate you start paying NI Tax on). So as a minimum you should adopt the Lower Earnings threshold :
So what does this mean?
Depending on all the assumptions we've made if you want to keep your salary really low and pay as minimal taxes as possible whilst qualifying for the national state pension, then for 22-23 your salary should be at a minimum of the Lower Learnings Limit (National Insurance Tax). This means you'll be paying no NI or Income Tax.
Other factors to consider:
If you own under a certain % of the shareholding, then for mortgage purposes salary pay slips may suffice as evidence of earnings for mortgage lending. But certainly you are better off speaking to a mortgage advisor as they are better placed to give you the various requirements from different lenders.
Also if you are considering any personal borrowing, then discuss the lending requirements with your lending broker/advisor so that you are as well informed as possible. I would advise reviewing this every few months or at the very least, annually.
If you're self employed then it's most likely you will need proof of filing your self assessment normally SA302 statements from HMRC to prove income levels for lenders.
If you are a director/shareholder of a limited company generally you'll need the same as above. However depending on the lender they may want to look at the health of your company and income potential from your business to make a more informed decision. In any case the most important documents are the SA302 statement confirming your individual total income and tax paid for the past 2-3 years.
This this doesn't constitute financial advice and we are not financial advisors. You should certainly seek independent financial advice for the most up to date advice relating to financial services products. If you would like us to recommend or put you in touch with a financial services partner we have worked with previously , do reach out and we'll connect you.
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