How to Take a Salary from your Limited Company
If you're self-employed, you need to work out the best way to pay yourself. Taking a salary from your limited company reduces the amount of corporation tax your company pays because it counts as an allowable business expense. You can also accumulate more qualifying state pension years if your salary is over the lower earnings limit of £6,240 (for the 2022/2023 tax year).
As a director, your salary would be paid to you in the same way you'll be paid by an employer, and you can issue a dividend, whereby shareholders (the owners of the company) are paid using company profits rather than reinvesting profits back into it. However, choosing to take either a low or high salary from your limited company can influence the tax efficiency of the salary.
Taking a Low Salary
According to HMRC, individuals who don't have a contract or receive regular salary payment for their company despite holding a position for it (known as office holders) aren’t subject to National Minimum Wage regulations, unless an employment contract is put there. This means that by taking a low salary, you won't have to pay income tax or National Insurance Contributions (NICs) for that salary.
If you have a total income under £12,570, you do not have to pay Income Tax as this money is your Personal Allowance. There are also some National Insurance thresholds (all of which are lower than the Personal Allowance threshold of £12,570) that you should be aware of. These include:
- The lower earnings limit: If your salary is above the lower earnings limit of £6,396, you’ll retain your state pension contribution record
- National Insurance: If your salary is below the NI primary threshold of £12,570 (as of July 2022), you won't need to pay any employee’s NICs. If your salary is below the NI secondary threshold of £9,100, your limited company (as your employer) won't need to pay any employer’s NICs.
Your salary should be high enough that it surpasses the Lower Earnings Limit, but low enough that you aren't required to pay NIC. The most tax-efficient salary would therefore be £758.33 a month/£9,100 a year, though this may vary from person to person.
Taking a High Salary
Despite a low salary being the best option for tax efficiency, there are also some advantages to taking a higher salary. With a high salary, you'll be able to receive maternity benefits as you need to be employed and be compliant with national Minimum Wage regulations in order to receive it. You will also have no issues with the national minimum wage regulations if you want a contract of employment. Additionally, you'll be able to receive an annual tax-free Personal Allowance if your salary is paid above the NIC threshold (and if you have other sources of income).
Other benefits of having a high salary include having more cover under permanent health, critical illness, personal accident or similar policies where payouts are calculated based on your earnings. Furthermore, you'll be more likely to apply to meet the criteria to apply for a loan or mortgage. These benefits of taking a higher salary are important to think about, as they may be more important than the tax efficiency of taking a lower salary.
The Effect of Tax and NICs
The amount of salary you choose to take also influences and is influenced by different types of tax as well as NICs, respectively.
Salaries are subject to tax via PAYE (pay as you earn). The implications of this are that with PAYE, the additional tax paid outweighs the benefits of reducing your corporation tax liability from a higher salary.
As mentioned earlier, the NI threshold can affect how much NICs are to be paid; this differs for employees and employers.
Employees have a separate earnings threshold before NICs are due because they aren't cumulative like Income Tax, and there is a maximum limit on the amount to be paid for NICs. Employees who aren't directors have a monthly threshold set and have to pay NICs if they paid above the threshold in a month - even if they have a reduced monthly salary for the rest of the year. Conversely, directors have an annual threshold that is 52 times the weekly threshold, and NICs must be paid when the salary goes over this.
Employers have the same NIC threshold as employees. However, the employer must pay 15.05% of the salary amount that the employee earns above the weekly National Insurance earnings threshold for the current 2022/2023 tax year. This applies to the director's salary and represents another PAYE the company must pay.
So, How Much Salary Should You Take from Your Limited Company?
This ultimately depends on your other sources of income, whether you would like to qualify for a state pension or not, whether you are considering taking dividends out of your business, etc.
The company director decides the salary amount to be paid and may wish to seek guidance from a professional accountant, to ensure they are paying themselves in the most tax-efficient way.
If you need any help and advice on how much salary you should take from your limited company, do not hesitate to get in touch with us here at Kubed Solutions for a free 30-minute consultation when you call 07762657277.
