How to Pay Yourself as a Limited Company Owner

As the owner of a limited company, one of the most critical decisions you'll face is how to efficiently and legally pay yourself. It's a balancing act between maximising your take-home pay and staying compliant with tax laws. It’s often wise to speak with an accountant as we can help you understand this complex topic and tailor a strategy specific to your needs.

Think of your company as a separate entity, like a garden you've just planted. Just as you decide when and how much to water your plants, you need to determine the most beneficial way to draw income from your company. And just like overwatering or under-watering can harm your garden, the wrong approach to paying yourself can have adverse tax implications.

Different Payment Methods

1. Salary

National Insurance Contributions (NICs):  Just as plants need the right amount of water, you need to consider how much salary will trigger NICs. Salary payments over £12,570 (which is both your NIC and your Personal Allowance threshold from 6 April 2022) will attract both income tax and national insurance contributions.

In addition to income tax and national insurance contributions that you pay as an employee, the company also needs to pay Class 1A secondary NIC on any salary payments above £9.100 at the rate of 13.8%. These NIC contributions are deductible expenses for the company, reducing its taxable profits and, consequently, its corporation tax liability.

2. Dividends

Dividends must be paid out of your company’s after-tax profits. It’s like only being able to host a dinner party if you’ve had a good harvest. You need to have enough profit after corporation tax to cover the dividends. Also, ensure proper documentation with dividend vouchers and board meeting minutes has been kept.

A critical point to note with regards to dividend payments is that, if a company pays more dividends than it has available profits, these dividends are essentially treated as a loan to the company. This means the amount must be repaid. Ensuring that dividend distributions do not exceed the available profits is crucial to prevent unintentional director's loans.

3. Combining Salary and Dividends: The Best of Both Worlds

Many limited company owners find that a mix of salary and dividends is the most tax-efficient way to pay themselves. A combination of salary and dividends can be tailored to your personal and company's financial situation.

• Optimising Take-Home Pay: By taking a modest salary (just enough to stay below the NIC and Personal Allowance threshold) and supplementing it with dividends, you can optimise your take-home pay.

• Flexibility: This method offers flexibility. Depending on your company's profits, you can adjust how much you take in dividends. Paying yourself as a limited company owner is a fine balancing act which need to be planned carefully if you want to be as tax-efficient as possible. Understanding your needs, your company's health, and the tax environment to cultivate the best financial outcome is crucial when you plan your salary as an employee.

Director's Loans

If you find yourself in a situation where you require additional funds from your limited company but are unable to increase your salary or declare a dividend at the moment, you have the option to transfer funds to your personal account as a Director's Loan.

However, it's important to note that these amounts must be repaid to the company. Interest has to be charged on the loan, and if interest isn't paid, a taxable benefit could arise.

Director's loans over £10,000 are considered a 'benefit in kind', attracting additional tax liabilities for both the director and the company. Furthermore, If the loan is not repaid within nine months of the company's year-end, the company may incur a temporary tax charge depending on when the loan was taken out (please refer to the table below). This tax is refundable once the loan is repaid.

To avoid pitfalls, it's essential to maintain accurate records and adhere to formal repayment plans. Regularly reviewing the company's financial position before declaring dividends is also vital to prevent overpayments and unintentional loans.

Conclusion

Tax planning is an integral part of managing a limited company, crucial for both staying compliant with tax laws and optimising your overall tax position. While this article offers a comprehensive overview of the methods and implications of paying yourself as a limited company owner, it's just the beginning. Engaging with a professional accountant can provide the personalised guidance necessary to navigate these choices effectively.

If you have more questions with regards to paying yourself as a limited company owner, visit our website or book a free 30-minute conversation on the following link: https://www.theflyingaccountant.co.uk/freeconsultation