One of the most important decisions to make once you start your own limited company is how much salary you should pay yourself as the director of the company. There is no perfect way to know how much limited company contractors should pay themselves but you will need to work out the most tax efficient way to draw earnings from your own company.
In a typical scenario most limited company directors take a small salary and draw most of the earnings as dividends provided their contract work is not caught under IR35.
How much salary should I pay myself?
It is advisable to draw salary from your company, as the salary is drawn from your company’s profit before corporation tax is applied. If you decide not to remunerate yourself with salary you will be paying more corporation tax. You also need to take into account the current income tax and NIC threshold before deciding your salary.
Listed below are some of the factors that you should consider when deciding your salary level.
- You will not have to pay any income tax if your salary does not cross the personal allowance threshold. (Personal allowance for 2015/16 is £10,600)
- For the current tax year i.e. 2015/16, only when your annual salary reaches £8,060 will you be required to make National Insurance Contributions (Employers’ and Employees’)
- The Employment Allowance (EA) introduced in April 2014; gives companies a refund of any Employers’ NIC paid, up to a maximum of £2000 (if you qualify for it). This allowance will rise to £3,000 per year from 6 April 2016. However, from 6 April 2016 companies where the director is the sole employee will not be able to claim the employment allowance. Also, Employees’ NIC on salary amount over £8,060 will still need to be paid.
- There is no legal requisition for limited company contractors to pay themselves the National Minimum Wage, except when there is a contract of employment with the company which states otherwise.
Along with the salary you can pay yourself dividends. Most limited company contractors are aware that dividends incur less tax than salary as NI does not apply to dividends. But for reasons mentioned above you should draw a minimum level of salary to reduce overall tax i.e. Income tax, National Insurance and Corporation tax.
From April 2013, you are required to communicate to HMRC the details of your tax and NIC deductions via Real Time Information (RTI). Failure to submit these details could have your Limited company face a late filing penalty.
If you are starting as a contractor or want to seek advice on how the RTI process works, you can consult Bradleys’ Contractors today on 0203 507 0087 or alternatively, email your query to firstname.lastname@example.org