Setting Your Limited Company Payroll: Factors to Consider

Limited Company

Now self-assessment season is over, it’s time to plan how you’ll run your limited company in the year to come. The new tax year is just a few weeks away, and there are some important decisions to make before then. For example, you’ll need to decide what combination of salary and dividends you’ll use to take money out of your company. In this article, we’ll look at some of the factors you might want to consider.

A Contractor's Guide Guide to Choosing a Tax Efficient Salary 2019/20: Click here to download>>

Your IR35 status

If you’re inside IR35 on a private-sector contract, 95% of your contract rate is taxed as salary, allowing 5% for the cost of running your company. This 5% is not allowed on public-sector contracts. You can’t take any of your income as dividends.

If you’re outside IR35 you’re free to set your own salary and dividend strategy, depending on your circumstances and goals.

Setting your salary

The cost of your salary is deductible from the company’s Corporation Tax bill, so your company will save 19% (2019/20) of whatever salary it pays you. What strategy you choose for your salary will depend on your circumstances.

The lower earnings limit (National Insurance)

If your salary is above the lower earnings limit of £6,136, (2019/20) you’ll receive a credit for National Insurance contributions, but you won’t actually pay any NICs until you reach the primary threshold of £8,633 (2019/20). Your entitlement to state pension and certain other benefits is dependent on your NICs, so it could be worth setting your salary above the lower earnings limit.

The primary threshold (National Insurance)

This is the point at which you’ll start to pay NICs, and your company will start to pay employers NICs. In tax year 2019/20 the primary threshold is £8,633. You’ll pay 12% NICs and your company will pay 13.8% employer’s NICs on salary over this threshold.  

Employment Allowance

If your company has more than one employee, it can claim a refund of any employer’s national insurance paid up to a maximum of £3,000, through Employment Allowance. If this applies to you, it could mean you’re better off setting your salary above the primary threshold.

Personal Allowance (Income Tax)

If you’re entitled to the full personal allowance, you’ll start paying the basic rate of 20% income tax when your salary reaches £12,501 (2019/20). However, there are still some circumstances where you might want to set your salary over this threshold.

Pension contributions

The annual maximum tax-free pension contribution is set at £40,000, but it’s limited to your Net Relevant Earnings (NRE) which excludes dividend income. If retirement planning is important to you, this might affect your salary/dividend strategy.

Minimum salary required

Some contractors have a minimum salary that they must be paid, either to satisfy visa requirements or for a mortgage or other credit application. If this applies to you it will obviously affect your strategy. However, if you’re only taking a higher salary to support a mortgage application, it might be worth using a specialist broker like CMME, who could base the application on your contract rate rather than your salary.

Other income

If you have income from elsewhere, for example if you have income from rental properties or investments this should be taken into account in your planning. Please make sure your accountant is aware of all your income so they can advise you correctly.

Planning your dividends

If your limited company has made a profit, after paying your salary, all expenses, liabilities and outstanding taxes, it can distribute these funds to shareholders as dividends.

Dividends are a tax efficient way to take money out of your company, as they don’t attract National Insurance contributions like salary does. They must be distributed according to the percentage of share ownership; for example, if you own 50% of the shares in your company, you’ll receive half of each dividend it pays

How dividends are taxed

The first £2,000 (2019/20) of dividend income will be free of income tax. Above this allowance, the rate you pay will depend on your overall income and which Income Tax bands the “top slice” falls into. Your dividends might be taxed at more than one rate.

Basic Rate 7.5%
Higher Rate 32.5%
Additional Rate 38.1%

If you’re with Orange Genie Accountancy

If you’re with Orange Genie Accountancy already, your dedicated accountant will be well acquainted with your company and your circumstances, and will be keen to discuss your strategy with you. If you have any questions, please contact your accountant.

If you’re not with us yet but you have questions about this issue, or if we can help in any way, please contact our expert team on 01296 468 483 or email info@orangegenie.com

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