21st April 2021 / Tax

How much should I pay myself as a Director?

When you set up your limited company, one of the first things to decide for yourself is how much should I pay myself? This is probably closely followed by …and what would be the most tax-efficient method? Should it be high? Low? Should I make it up with Dividends? Truth be told, there's probably a lot of questions you ask when deciding how much to pay yourself as a director. Let's take a look at some of the areas you could consider before deciding what's best for you.

Usually, the most tax-efficient way to take income from your business is to have a mixture of salary and dividends, although you'll probably need to think about the tax rate at the time; really it depends on your own personal circumstances.

The salary will be paid to you as a director, but please make sure that you meet your tax filing and reporting responsibilities with HMRC under their Real Time Information (RTI) rules...

...or you could ask us to manage your payroll for you!

We help a lot of our directors ensure they are making the most sensible and tax-efficient choices when it comes to paying themselves a salary.

Why should I pay myself a salary?

There are a couple of reasons why you should pay yourself a salary:

  • It's counted as an allowable business expense so it'll reduce the profit of your company - which means that your corporation tax liability will come down.
  • If your salary is above the lower earnings limit you can accrue qualifying years towards your state pension.

So far so good...

How much should I pay myself?

You can pay yourself as little or as much as your company can afford, there are benefits and potential minefields for either choice.

Under HMRC rules, an office holder - which typically means someone who doesn't have an employment contract or doesn’t receive regular salary payments, is not subject to the national minimum wage regulations so can be paid a lower wage. But conversely, there are also benefits to paying a higher salary. Let's look at both sides:

Low Salary

  • You'll be income tax-free up to the personal allowance limit.
  • There will be no NIC contributions subject to the NIC threshold – there is a “Lower Earnings Limit”, a “Primary Threshold” and a “Secondary Threshold”.

So ideally you would set your salary above the “Lower Earnings Limit” but below the level of the “Primary” or “Secondary” threshold.

It makes sense to pay yourself a low salary right?

High Salary

To consider whether or not to take a higher salary, it is best to look at the disadvantages of taking a lower salary. This is the best way to make a decision when faced with the director's salary conundrum.

  • A low salary means reduced maternity benefits, something to think about if this is likely to apply to you.

  • You could miss out on using all of your annual tax-free allowance.

  • In insurance policies where pay-out can be relative to salary, you will end up with a reduced cover.

  • If you prefer to have a contract of employment there could be issues with the national minimum wage.

  • Most financial institutions are unsympathetic to a low salary so it could impact any loan or mortgage applications you make.

What about topping up with dividends?

Hopefully, your company will be profitable then you will be able to either reinvest the profit into the company or you can take out the profit and issue a dividend payment to shareholders.

This would be just you if you own and manage your limited company and it doesn't apply to you if you're self-employed. This can be a tax-efficient way to take additional income out of your company.

It might also help to have a look at our recent blog How much dividend can I take?

We're here to help you navigate these tricky decisions. We're based in West Bridgford, Nottingham, but we work with clients all over the UK. To talk about how we could help you, get in touch today.

Geoff Selby, Director
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