As a Business Owner What Should I Pay Myself?
If you are running your own Limited Company, you will be faced with many choices – some easy some not. Whilst some choices will be much more important than others, there are some that you may not have considered but which can still prove to be vital.
One such area often overlooked by business owners is that of their own salaries. Whilst this may sound like a positive problem to have, it can be much more difficult than first thought – particularly regarding tax purposes. We have put together the following information to help you get a better understanding of the dos and don’ts regarding paying yourself a salary so that you can make a much more informed decision and ensure the right choice for you and your business.
Why should you take a salary?
There are two main reasons why as the owner of a Limited Company you should take a regular salary from your company. Firstly, your salary will be counted as an expense by HMRC. Therefore, by claiming a salary, the amount of Corporation Tax your business will have to pay will be reduced – saving you money. Secondly, if the salary you pay yourself is above the Lower Earnings Limit (£6,032 in 2018/19), you will build up the number of qualifying years you have for your State Pension. These benefits are particularly useful for smaller businesses.
A big salary or a small salary?
If may seem like a silly question, but you will have to decide whether to pay yourself a large salary or a smaller one. However, before making your decision, there are a number of things that you need to be aware of regarding tax and business-related deductions. Before deciding against taking a low salary, you should take the following into account:
All UK taxpayers in 2018/19 have a personal allowance of £11,850. What this means is that if you earn this much or less each year you will not be required to pay Income Tax. Likewise, there are also National Insurance Contribution (NIC) issues, such as whether you fall under or over the NIC payment threshold.
Furthermore, those of a Limited Company whom are classed as ‘office holders’ (being those who hold a position at the company but do not have a contract or receive a normal ‘regular’ wage) are not subject to the National Minimum Wage. This means that low salaries can be paid to such individuals, and also removes the need for NIC to be paid. An additional benefit to this is that if your salary falls below the £8,424 minimum threshold, you will not be required to make NIC contributions. However, you will still retain your State Pension contribution record.
Why take a higher salary?
Whilst we have shown that there are some advantages to taking a lower salary, there are of course also some disadvantages. One such disadvantage is the removal of maternity benefits. This is because in order to qualify for maternity benefit you need to be employed and thus compliant with the National Minimum Wage. Furthermore, your annual tax-free allowance could also be negatively affected if your salary is at the NIC threshold.
It is therefore advised to seek the advice of a qualified accountant who will be able to best advise you as to the what the consequences of your intended salary and any dividends you intend to take will be such as our team here at Quant. Other disadvantages to taking a reduced salary can include reduced cover on health and personal accident policies due to related benefits being calculated on total earnings.
Another option you have when operating as a business owner is paying yourself money from the company in the form of dividends. Dividends are what you do with any profits your business is making. Regarding these profits, you have three options – either reinvesting it back into the business, take the money out and pay it in the form dividends to shareholders, or lastly, a combination of the two. Shareholders refer to the owners of the company, be it just yourself or a number of individuals who have invested in it. Therefore, if you own your own business, you can pay yourself a low salary and top this up by giving yourself dividends. One of the benefits of doing this is that it is a very good tax-efficient way of paying yourself.
By combining dividend payments with a low salary, you can guarantee you will be as tax efficient as possible – ensuring you pay as little as legally required. A qualified accountant will be able to advise you as to the best route to take in this regard.
Tax implications of your salary
Just like all regular full-time employees, you will be required to pay tax via PAYE. There are three separate PAYE taxes that you must be aware of and which will influence how much tax you pay on your salary – these are Income Tax, Employee National Insurance Contributions and Employer National Insurance Contributions.
Income tax takes into account everything you have earned in that tax year, such as salary, dividend payments and any profits earned from rental payments.
Employee National Insurance Contributions
Unlike Income Tax, this tax is not cumulative – meaning there are separate earnings thresholds that must be met before NICs are paid. For higher-rate taxpayers – there is a maximum limit of NICs that can be paid. This limit is set at a monthly rate – meaning if you are paid over this monthly threshold at any point of the year, you will be required to pay NICs – even if your wages then drop below this threshold again. For directors, this threshold is calculated annually (simply 52 X the weekly threshold). If the annual salary is over this amount – the director has to pay NICs
Employer National Insurance Contributions
The NIC threshold is worked out the same as for employees. That is, for every employee salary above the weekly NIC threshold, you as the employer will have to pay NICs on these – this is a PAYE tax that all companies must pay