What’s the most efficient way to take income out of your company?

If you’re contracting through your own limited company, calculating the best way to pay yourself will be a priority for you. If you’re a client of Orange Genie Accountancy your accountant will make sure you’re on top of these issues but it won’t hurt you to understand what they are. For those who are not so lucky, do read on, and if you have any questions please don’t hesitate to contact Orange Genie Accountancy on 01296 468 185 for clarification and to find out how else we can help you.

As a director of my own limited company, how should I pay myself?

Assuming you’re working outside by IR35, your limited company will give you great deal of flexibility in how they take money out of you company, and indeed this is one of the reasons many contractors choose to incorporate. The most common advice is to take a small salary, combined with dividend payments. The advantage here is that dividends you don’t have to pay National Insurance Contributions on dividend income.

So why should I pay myself a salary?

Any salary you pay yourself will be deductible against your company’s corporation tax bill, so if you set your salary at the right level it can be very much worth your while. You set the level of your salary, so you can take as much or as little as you like. There are some things to consider when you’re setting your salary level, though.

The full personal allowance for tax year 2017/18 is £11,500, so assuming you’re entitled to the full allowance and you have no other income you’ll pay no income tax on a salary below this amount.

The threshold for National Insurance Contributions is £8,614 for both Employers and Employees national insurance.

For many contractors, this makes £8,614 the most tax efficient salary level, as this amount will be deductible from your company’s corporation tax without attracting income tax or NICs.

What if my company claims Employment Allowance?

Unless you’re the only director of a company with no other employees, or you’re working inside IR35, you might be able to claim Employment Allowance, which could make it advantageous to pay more of your income as a salary.

Employers Allowance refunds any Employers National Insurance paid by your company, up to a £3000 maximum, though Employees National Insurance will still be due.

On a salary of £11,500 you’ll pay £400.32 in Employees National Insurance, but your company will save £633.84 in corporation tax and the £430.37 that your company would pay in Employers National Insurance would be refunded through your Employment Allowance claim.

So if you’re eligible to claim Employment Allowance, a salary of £11,500 may be the best way to go. You’re not allowed to claim EA if you’re working inside IR35 or you’re the only director of your company and it has no other employees.

How are dividends taxed?

The dividend allowance means you don’t pay any tax on the first £5000 of dividend income in the tax year. This was due to fall to £2000, but this section was among those dropped from the Finance Bill to speed its passage through the House of Commons. It remains to be seen if this change will be made after the General Election.

After the first £5000, the rate of tax you pay will depend on the tax band it falls into, after your salary and any other income is taken into account.

Basic rate: 7.5%
Higher rate: 32.8%
Additional rate: 38.1%

What else do I need to know about dividends?

Once your company has covered all its expenses and tax obligations, the remaining profit can be distributed to shareholders as dividends. Dividends must be paid in amounts matching the proportion of shares owned by each shareholder.

You can declare dividends as often as you like, but there must be enough profits in the company to do so, and the decision to make a dividend declaration must be recorded via board meeting minutes. Each shareholder must be provided with a dividend voucher, which can be electronic or on paper. Orange Genie Accountancy clients can do this quickly and easily through FreeAgent, our chosen web-based accountancy software. You’ll need the information from you dividend vouchers to complete your self-assessment tax return.
 

If you have any questions about this or any issue, or for more information about how Orange Genie Accountancyt can help you, please contact us on 01296 468 185 or email us at accountancy@orangegenie.com.

Why Orange Genie Accountancy?

Orange Genie Accountancy offers fixed fee accountancy packages to contractors and freelancers. Each client has unlimited access to their own dedicated approachable and friendly accountant. All Orange Genie Accountancy accountants are specialists in the contracting market, so they can give you bespoke, high quality advice.

We will always keep you informed about anything that could affect you and your company. Our relationships with our clients are extremely important to us so we'll be in touch often, whether it be face to face, over the telephone or email.

Our packages start at £75 + VAT a month for an online service. Our most popular package is £120 + VAT a month which provides you with your very own dedicated accountant as well as:

  • Unlimited accountancy support
  • Face to face meetings so we can get to know you and understand your contracting goals
  • Proactive contact
  • Director and employee payroll
  • Annual Return
  • Self-Assessment Return
  • A fully compliant service so you are safe in the knowledge that you are meeting your legal obligations
  • Access to the Freeagent Software, which is updated in real time so you can always see how your business finances are looking

​And much more, includingaccess to wealth management advice, IR35 reviews and pensions planning. 

If you would like to appoint Orange Genie Accountancy as your accountants please either fill out our enquiry form or give one of our friendly expert accountants a call on 01296 468 185 or email accountancy@orangegenie.com

Request a Call Back