Readers question: How do I pay myself as an employee of my limited company?
Experts answer: The expert answering this question is Gary Addison, the founding director of Redundancy Claims UK.
As an employee of a limited company, you will typically pay yourself through salary and/or dividends. You are also able to release money from the business through pension payments. By tax planning in advance, you are able to structure your salary and dividend levels to ensure tax efficiency and maximise take-home pay in accordance with HMRC guidelines.
When calculating salary, this is typically arranged to sit at the national insurance threshold if the director is not required to pay the National Minimum Wage as part of a contract or agreement.
Although the director is the sole proprietor and employee of the limited company, both Employers and Employees NIC will be payable. The company (employer) is liable to pay Employers NIC and the director (employee) is liable to Employees NIC. However, this only applies to salaries in excess of £ 8,632 for 2020/21.
If eligible, the Employment Allowance allows businesses to reclaim up to £3,000 in Employer NIC per tax year.
The most tax efficient salary will be in line with the primary threshold (£8,632) which incurs no tax or NI. The personal allowance threshold for 2020/21 is £12,500, so once you exceed this amount, you will be required to pay income tax.
The remaining will be paid through dividends which should reflect your percentage of ownership in the business. Dividends can only be paid if there is sufficient profit left in the business once tax obligations and expenses have been fulfilled. The tax-free dividend allowance allows you to take £2,000 in tax-free dividends. If the business has not made sufficient profit, it is illegal to make dividend payments. The director will be responsible for deciding whether the business is able to make dividend payments, and if so, the payable total.
The 2020/21 allowance for annual pension contributions is £40,000 or 100% of your annual salary, whichever is lower. If you exceed £40,000, you may be subject to an annual allowance charge. Alternatively, you may be able to bring forward any unused allowances from the last three tax years.
If adjusted income totals more than £150,000, the annual allowance is tapered. The annual allowance will fall by £1 for every £2 of adjusted income between £150,000 and £210,000. For adjusted incomes of £210,000 or more, the allowance will be £10,000.
Pension payments made on behalf of an employee are deductible for corporation tax. If the business makes a tax loss as a result of salary and pension payments, the contributions may not qualify for tax relief.
Whether it’s DIY accounting or through an accountant, it is essential to understand how you will be taxed and forecast accordingly. By calculating the most tax efficient salary, you will be able to make the most out of your money. As an employee of your limited company, you will be able to pay yourself in a combination of ways, allowing for more flexibility and freedom.
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