Understand the two most common ways Directors pay themselves from their Limited Company, using salary and dividend for the 2021/2022 tax year. As well as which is the optimum mix of salary and dividend that achieves the biggest tax saving for you and your LTD.
Updated 7 November 2022
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Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
1. How To Pay Yourself from Your Limited Company
There are two main ways you can pay yourself as a Director of a Limited Company:
- Salary
- Dividends
These are not mutually exclusive and by finding the optimum combination of salary and dividend Directors can pay themselves in a way that will legitimately reduce their LTD’s and personal tax bills. Salaries and dividends are affected by the following tax rates and tax-free thresholds:
2. What are the Benefits of Taking a PAYE Salary from Your Limited Company
To pay yourself a salary from your Ltd Company you’ll need to register as an employer to set up a PAYE scheme with HMRC in the name of your business. You’ll then need to run payroll, give yourself a payslip and report to HMRC each month the amount that you have paid yourself, along with any national insurance and income tax deducted. The benefits of doing this (and taking on the additional responsibility) is that you:
- Have a payslip which is useful if you apply for loans or mortgages;
- Protect your ability to claim state benefits like state pension or statutory maternity pay;
- Can claim your PAYE salary as allowable business expense which reduces your taxable profit for corporation tax purposes;
- Can take your PAYE salary even if you’re business is making a loss (you cannot take a dividend if your business make a loss or there are insufficient reserves on the balance sheet).
Despite these benefits, paying yourself through PAYE can cost more in terms of income tax and national insurance than dividends. So finding the tax-efficient mix of salary and dividend can minimise your tax bill.
3. The Optimum Mix of Salary and Dividend for 2021/2022
This mix of salary and dividend for the tax year 2021/2022 is most likely to be tax-efficient if you:
- Have no other forms of taxable income and adjustments for your taxes
- Earn less than £100,000 and are unaffected by the personal allowance restriction
- Are on the standard tax code for 2021/2022 of 1257L (previously 1250L)
Let’s assume you want to pay yourself a gross salary of £32,500 using this method your tax bill will be calculated as:
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant and there are other methods of paying yourself from your Limited Company. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
Compare this to if you took your salary of £32,500 through your PAYE scheme only and no dividend. You would pay total tax and national insurance:
Limited Companies are not eligible for the £4,000 employment allowance if the only employee is a Director of the Limited Company paid above the Secondary Threshold for Class 1 National Insurance, which for the 2021/2022 tax year is £8,840 per annum.
Comparing the two options take-home pay would be £25,733 under PAYE compared to £31,155 by combining salary and dividend. By taking into account the corporation tax saving alongside personal tax saving, tax overall is wiped out by combining dividend and salary when paying yourself from your Limited Company.
Related:
- How Payroll Works for UK Small Businesses
- Directors Loans and Repayment Rules Explained
- How to Calculate Corporation Tax
- UK Dividend Tax Rates 2022
Taxes are changing! From April 2024 sole traders will need to report their earnings and pay tax on a quarterly basis. This is known as Making Tax Digital, which you can read more about in this guide to help you get prepared.
