There are a lot of benefits for operating a limited company. From limited liability to various tax benefits attract many people towards a limited company rather than a sole proprietorship. Being a separate entity, the finances of the limited companies belong to the business, not individuals. It means that a person cannot withdraw money from a limited company as in a sole proprietorship where a person takes out money as its personal bank account. So in this blog, we’ll answer ‘how to pay yourself from a limited company’ if you’re a shareholder or a director.
Three Ways to Pay Yourself from a Limited Company?
Here we’ll discuss three ways to pay yourself from a limited company.
- Paying yourself a salary
- Paying yourself via dividends
- Making a contribution to your pension
1) Getting Salary
As a business owner, paying yourself salary via PAYE can be a great way to take out money from a limited company. This will be reported to HMRC via a real-time information system (RTI). As per the salary you get, you need to make Income Tax, National Insurance contributions from every pay period. Along with that, you need to pay 13.8% of the Employer’s National Insurance contribution on your yearly salary if it is over the NIC secondary threshold of £8,840 for the tax year 2021-22.
To avoid paying Income Tax and NIC, many directors pay themselves a salary below the NIC primary threshold of £9,568 (2021-22). Additionally, they can pay themselves salaries below the Personal Allowance of £12,570 for avoiding Income Tax. However, Class 1 National Insurance is payable on the earnings between £9,568 and £12,570. The other way to withdraw money from the LTD is via a dividend, where the first £2,000 are tax exempted.
2) Paying Via Dividends
If your company has earned profit after paying the corporation tax, the rest of the amount is distributed amongst shareholders as dividends. As per the dividend amount, you can avail of the dividend allowance. Currently, in 2021/22 the tax-free dividend allowance is £2,000.
Remember that if your Personal Allowance threshold is £12,570 (2021-22). If your salary and dividends exceed this threshold, you have to pay income tax. But luckily, you can add your dividend allowance to the personal allowance to get £14,570 of income without paying any income tax in 2021-22. If your combined salary is over £14,570, you have to pay tax.
For dividends that are up to the value of £50,270, you need to pay 7.5% of the tax. And the dividends above £50,270 and under £150,000, a tax rate of 32.5% is payable. If your dividend amount exceeds £150,000, you need to pay 38.1% tax on it.
Worried about the taxes. Contact our tax experts for help!
3) Making Contribution to your Pension
The third way to pay yourself from a limited company is via a pension. As company make contributions as pension to its employees and directors. The rules are complex as corporation tax is payable on the pension contribution made by the company and will not be tax until withdrawn.
Luckily, in many cases, a person can withdraw up to 25% of the pension fund as tax-free. And the pension allowance of a person is currently £40,000 per year. Moreover, if your allowance is not used for the previous three years, you can avail of it. it can be one of the great tax-efficient ways to withdraw money from your limited company.
Quick Sum Up
After giving this post a read, you have got the answer to “how to pay yourself from a limited company”. So, the first way to pay yourself is through salary, the second is via dividends and the third is through the pension contributions made by the limited company. In this way, you can efficiently withdraw enough money without paying a lot of taxes. Therefore, you need to withdraw as a minimum amount and avail all allowances and tax reliefs to get the optimal advantage. In his way, that companies can be tax-efficient in many ways than other business structures.
So, get advice from our professional tax expert or accountant to be on the safe side. At Cheap Accountants In London, we offer compliance-only packages for limited companies at an affordable rate – inclusive of preparation and filing of company accounts and tax returns. Reach out today!
Disclaimer: This blog is for your general understanding about the above topic.