One of the first questions we are asked when we start working with a new client is
“How should I pay myself?”
The answer, you will be glad to know, is VERY simple.
We recommend that, as a director, you always pay yourself a salary equal to the national insurance earnings threshold. For 2014/15, this is just under £8,000 per year (£663 per month).
This has three primary benefits:
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You will pay no tax or national insurance
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Your company will save £1,600 in corporation tax
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You will still be contributing to your full state pension entitlement
Obviously, £663 a month is not going to pay the bills at home, let alone give you the beer money, holidays and generally rock ’n’ roll lifestyle you and your family want to live!
The answer to this is dividends. In addition to being a director of your limited company, you are probably also a shareholder. Shareholders receive dividends and you can earn £30,000 in dividends each tax year on top of your salary and pay no personal tax at all!
But I still need more….
If you’ve done the maths on the above, you’ll have worked out that you can draw just over £3,000 every month without paying any personal tax. If that’s not enough, here’s a few more ideas for getting profit out of your company tax efficiently:
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Pay your spouse a salary
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Give your spouse shares (and reward them with dividends)
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Make contributions to a personal pension
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Borrow money from your business
And if there’s still excess reserves in the business….
Well if you are still wondering what to do with the rest of the profits in your business and you don’t want to invest it in developing the business further, then invest it and create even more profit!
You could simply place the cash in a high interest savings account in the business name, or you can be a bit more adventurous and invest in shares or other investments.
Never pay personal tax though
None of the above leads to any personal tax, ever! If you draw more dividends than the £30,000 tax free, you will have to pay some personal tax at 25% of that excess. But if you keep within these limits, you pay nothing.
One day, you will either sell or close the company. If you have left profits to roll up, there are some very attractive options for taking the remaining profits tax effectively.
