New Limited Company: 'How Do I Pay Myself?' Part 2 - Salary
As I said last week, congratulations on setting up your new limited company, you may have previously been self employed and decided to move to running as a limited company or you may have set up straight away as a limited company, either way the question of how do you pay yourself is probably on that list of things keeping you awake at night!!
As a limited company you can pay yourself a mix of salary and dividends, and in general a mix is the most tax efficient thing to do. Benefits are also an option to be considered too.
Because this is a big subject, this blog is going to be a 3 part series over July:
- Part 1 – Dividends
- Part 2 – Salary
- Part 3 – Benefits
How do I set my salary?
As a director of a company you don’t tend to have a contract of employment and aren’t bound by minimum wage requirements, this means that you can set your salary in a tax efficient manner.
If you are a sole director and have no employees then for the 17/18 tax year the tax efficient amount to pay yourself is £8, 164 per annum, or £680.33 per month. At this level you’re earnings are within the personal allowance (17/18 - £11,500 per annum) and are at the point where you receive National Insurance credit without paying employees or employers NI. But don’t panic that you aren’t using all of your personal allowance, the unused amount (£3,336) means you can take a bit more dividends out without paying any personal tax.
If there is more than just you in the business (i.e. you have a fellow director) then it is actually more tax efficient to pay a salary of £11,500 as although you will have to pay some employees NI the amount paid is less than the corporation tax that you will save so it makes sense!
How do I pay them?
At the end of each month you transfer your pay amount from your business account to your personal account.
What do I need to document?
You need to have a payroll scheme set up with HMRC (https://www.gov.uk/register-employer) and each month you have to report to HMRC what you have paid – this is real time information (RTI) reporting. If you are a client then I can help you with setting up payroll and can run this for each month too, if you aren’t a client then I don’t offer payroll as a stand-alone service .. sorry!
There are lots of other options for running payroll from HMRC’s basic tools or commercial third party software too.
Payroll is an allowable expense for corporation tax (where as dividends aren’t and are paid out of post tax profits).
Note that it has been assumed that you have no other income in the tax year besides from your limited company, if you have other income then you need to see what that is to work out the optimum salary for you.