In our guide below, we play out the most common scenarios a LTD company director might find themselves in and each instance what the best way to pay your own salary is with tax in mind.
This is a question we are asked all the time from our clients and the answer; it depends.
How you pay yourself depends on a variety of factors such as your personal income (outside the LTD company), how many employees you have, how much Employers Allowance you have used, have you had employment prior to directorship in the same tax year and much more.
Below we list the most common scenarios which most people will be faced with.
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I’m the Only Director and Employee of the Company and Have No Other Taxable Income Outside the LTD Company
This is the most common scenario for small, start-up businesses. In this case a mixture of salary and dividends would be most tax efficient.
A salary of £737 per month (for the tax year 2021/22) would qualify you for National Insurance credits whilst not incurring any National Insurance or income tax.
Any amounts over £737 per month would be by way of Dividends providing you have the profits to do so, as this is more tax efficient than a higher salary.
I’m the Only Director and I Have at Least One Other Employee OR There Are More Directors Other Than Myself on the Payroll, and I have No Other Taxable Income Outside the LTD Company
This usually happens when a director is taking on their first employee and wants to know if it affects their salary.
In this scenario, it is usually best for the Director to take a salary up to their Personal Allowance of £12,570 (for the tax year 2021/22) per year.
This will mean that the Director will pay some Employee National Insurance of about £382 for the year but no Employers National Insurance (assuming there is sufficient Employers Allowance left). However, the savings on Corporation Tax outweighs the Employee National Insurance cost and will result in a net lower amount of tax paid overall.
This assumes that the employer is claiming the Employers Allowance and has at least £540 Employers Allowance remaining to claim for the tax year.
If there is more than one Director on the payroll then the same still applies, however, you will need to agree this salary with the other director/s and check any agreements you may have between each other.
I’m the Only Director and I have Taxable Income Outside the LTD Which Uses up my Personal Allowance (such as employment or rental properties).
In this case, the Director should not be on the payroll (for tax reasons) as taking a salary will result in more tax overall than taking dividends. This is due to Income Tax starting at 20% plus Employees National Insurance and Employers National insurance which costs more than the Corporation Tax saving of 19%.
Any money taken out by the Director (in excess of any money put into the company) should be by way of dividends as tax on dividends starts at 7.5% with the first £2,000 being tax free each tax year.
Would you like Further Advice About LTD Director Salaries?
Please note that the above scenarios may not be the best for you or even applicable to you and looks purely from a tax saving perspective – contact us today to arrange a free, no obligations call from experienced and qualified chartered accountants, at firstname.lastname@example.org or call us on 01237 478246.
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