As a limited company director, you will usually pay yourself a small salary, and draw down most of your income as dividends. Are there any rules which govern the level of salary you take, and what are the tax implications?
Assuming that you are not a contractor/consultant caught by IR35 (in which case you would have to draw down all your profits as a ‘deemed salary’), one of your first jobs as a limited company director is to decide how to remunerate yourself.
Unless you have a contract of employment between you and your own company (which is unlikely), you are not obliged to pay yourself the National Minimum Wage.
In fact, you don’t have to pay yourself a salary at all, but it would be fairly unusual for you not to do so, as salaries are drawn from your company’s profit figures before Corporation Tax is applied.
Your choice of salary level is more likely to take account of the current income tax and National Insurance Contributions thresholds than anything else.
Tax threshold considerations
- The Personal Tax Allowance for the 2018/19 tax year is £11,850. You will pay no income tax at all on salary levels beneath this threshold.
- Your company must pay Employers’ NICs on salaries paid to employees above £162 per week, at a rate of 13.8%.
- You, personally, will be liable for Employees’ NICs on any salaried income you receive between £8,424 and £46,350 on an annual basis, at 9%. Above £46,350 annual profits, the rate falls to 2%.
How much salary should you pay yourself?
Following the introduction of the Managed Service Company legislation in 2007, your accountant can no longer tell you the best salary level to pay yourself, as this would be an indicator that your limited company is being ‘controlled’ by your accountant, although they will be able to provide tax illustrations for you based on different salary levels.
You may decide to pay yourself a salary above the NIC threshold, to ensure that you keep your contributions up to date, otherwise, you may not be able to claim the full state pension on retirement.
Remember that your salary runs from April 6th until April 5th each year, so take into account any salary you have already taken in the current tax year when working out your remuneration strategy.