Paying yourself through a limited company: what’s the best way?

As a company we often get asked by our clients and other associates “what is the best way of paying yourself through a limited company?”.

In short, there is no “one size fits all” response you can give to this question. There are so many other factors that need to be considered. Below we explain some of these factors in more detail.

There are many different elements that can make up the renumeration package (the total compensation received, including other benefits or perks) of a company director or shareholder.

These include but are not limited to: PAYE income processed through the payroll, dividends paid from distributable profits (profits remaining after taxes have been paid), company benefits submitted via annual P11d returns such as health insurance, company vehicles or low-cost loans or additional pension contributions in excess of the minimum 3% requirement.

Key points to consider:

• Personal Perspective

Dividends are subject to income tax but not national insurance.

PAYE is subject to both income tax and national insurance plus the company would pay employer’s national insurance.

Full state pension requires 35 qualifying years, with a minimum of 10 years to receive any state pension. The minimum earnings for a qualifying year are £6,396 (the lower earning limit). Earnings between £6,396 and £12,570 the NI payable is 0. Therefore, earnings between £6,396 and £12,570 will qualify as earnings for NI without actually paying any NI.

• Company Perspective

Dividends are paid out of post-tax profits and are therefore not a tax-deductible expense.

Gross salary and any employer’s national insurance payable in relation to that salary are both tax deductible expenses and will reduce profits for tax purposes.

As above, the cost of providing additional pension contributions, providing they are wholly and exclusively incurred for the purpose of the employer’s trade, along with other benefits, are also tax deductible.

Reporting requirments:

PAYE requires RTI submissions to HMRC on a monthly or annual basis. The company must first be registered as an employer if they aren’t already.

Dividends require dividend vouchers and available profits for distribution. These are reported on your personal self-assessment tax return.

Cash flow:

PAYE creates immediate liabilities due to HMRC, payable by the company either monthly or quarterly depending on the total PAYE liability of the company.

Dividends have annual balancing payments and six monthly payment on account instalments through self-assessment, payable by the shareholder.

Questions for consideration:

• Will all shareholders require the same level of dividends? The value of dividends issued needs to be proportional to the shareholding held.
• Does the business need to leave funds available for future plans?
• What are the distributable profits available?
• What is the company’s position for corporation tax purposes? PAYE can reduce company profits; dividends are paid post corporation tax.
• What is the individual’s pension position? Payments into personal pensions are based on relevant earnings. Dividends do not count as relevant earnings, but PAYE income does.
• What are the individual’s other earnings? This can impact the tax payable on any funds withdrawn from the company.

Individual calculations are required to calculate the best extraction method for you, please get in touch if you would like further information.