Some of you may be operating your own limited company. It might be just you, maybe you and your partner/spouse or you and your employees.
So how much can you pay yourself? Did you know that from April 2011 you can pay yourself a salary of £589 a month without paying any tax or NI?
At this level:
- You get National Insurance Credits towards some benefits (eg pension)
- You must register as an employer and complete employer’s annual returns
- You don’t have to pay any tax or National Insurance
- This is a perfectly legal and acceptable way of paying yourself from your company.
One of the tax-efficient ways to operate* as a shareholder of a limited company is to pay anything over and above the salary as dividends. A dividend is the distribution of ‘after-tax profits’, so it’s essential that the company has sufficient retained profits to pay a dividend.
If this rule is not followed, the dividend could be viewed as an unlawful distribution of the company’s funds.
No additional income tax** is due on dividends received where the total income of the person is below the higher rate threshold.
The higher rate threshold from April 2011 is £35,000.
Assuming that you have no other income, you can pay a divided from the company of £31,866 before you pay any additional income tax.***
Other income covers interest received, rental income received, additional dividends etc
On an annual basis you can pay:
- Salary of £589 per month = £7,068 per year
- Net dividends from the company of £31,866
- Total = £38,934
*Subject to your specific circumstances. Check with your accountant whether this is best for you. This is a guide only.
**Corporation Tax has been paid on the company profits at 21 per cent until 31 March 2011 and 20 per cent from 1 April 2011. So while the above is free from additional income tax, Corporation Tax has been paid on the profit where profit = income less costs (the salary is an allowable cost).
***Calculation for dividend - here’s the maths!
- Personal allowance £7,475
- Higher earnings threshold £35,000
- Gives total income of £42,475 before additional income tax is due
- Salary of £7,068 leaves gross dividends of £35,407 to be paid
- Net dividends (the amount paid from the company) £35,407/100 * 90 = £31,866