Paying yourself - PAYE, dividends and loans
Paying yourself through a limited company is different from paying yourself as a sole trader. You and your company are not the same - the company exists as an entirely separate in the eyes of the law; therefore, all income belongs to the company in the first instance. To receive personal income from your company, you will have to pay yourself a salary through PAYE or issue dividend payments if the company has the profits to pay these dividends from. You can also reimburse yourself for business expenses and receive director’s loans to borrow or reclaim money from your company.
Most companies use an accountant to take care of their finances. We strongly suggest seeking professional advice to ensure your new business is as tax-efficient as possible. Whilst you may be reluctant to pay accountancy fees, it is often a false economy to take care of your own business finances and accounting requirements.
Paying yourself a director’s salary
If you are a company director, you can pay yourself a salary for your role. You must register your company as an employer with HMRC and operate PAYE as part of your payroll if you plan to pay yourself, or any employees, more than £113 per week (£490/month or £5,876 per annum). The company will have to deduct any Income Tax and Class 1 National Insurance Contributions from your salary through PAYE. These deductions should be paid to HMRC, in addition to employers’ Class 1 National Insurance Contributions on any employees’ earnings above £157/week.
If you plan to run payroll yourself, you must report all employees’ payments (including your director’s salary) and deductions to HMRC on or before each payday. Your payroll software will calculate the amount of tax and NIC you owe. You can send the required payments to HMRC on a monthly basis.
How much should I pay myself?
You can pay yourself whatever you like, provided the company has enough money to do so. Most directors, however, choose to keep their annual salary below the NIC threshold and/or the Personal tax-free Allowance threshold. For the 2017-18 tax year, these thresholds are £8,164/year (NIC) and £11,500 (Income Tax threshold).
If you keep your salary below the NIC threshold, you will not have to pay any National Insurance or Income Tax to HMRC. If you take more than the NIC threshold but less than your tax-free Personal Allowance, you will only have to pay NICs on your salary between £8,164 - £11,500. Salaries above £11,500 will be liable for Income Tax and National Insurance.
You do not have to limit your annual income to £11,500 - you can take additional income as dividend payments. Dividends are paid out of company profits after the deduction of corporation tax (20%) but you will not have to pay Income Tax on these payments, thus providing a tax-efficient way to remove money from your company.
If your company has made enough profit, you can pay yourself dividends to top up your director’s salary. Dividends are paid to shareholders after the company has paid corporation tax on its taxable income, but there is no Income Tax liability on dividend payments.
Corporation tax is currently 19%, whilst Income Tax rates range from 20% to 45% as your income increases; therefore, it is better to take part of your income as a salary and the rest as dividends, rather than taking your entire annual earnings as a salary and paying more Income Tax. You will have to pay tax on your dividend payments whether you are a higher or lower rate taxpayer, but tax rates on dividends are lower than Income Tax rates.
How to issue a dividend
You must hold a directors’ meeting to ‘declare’ dividends. If you are the only director, you still have to hold a ‘meeting’ and take minutes to record the decision - this is simply a formality. You can only declare dividends if your company has sufficient retained profits after all business expenses and costs have been paid, otherwise the dividend will be considered illegal.
When a dividend is declared, you must write up a dividend voucher with the following details:
- Date of issue
- Name of your company
- Name of the shareholder being paid the dividend
- Amount of the dividend
- Amount of the ‘dividend tax credit’
You should provide a copy of the dividend voucher to the recipient of the dividend, and keep another copy with the company’s statutory records at your registered office or SAIL address. You can get dividend templates online or from an accountant.
Dividend Tax Credit
A dividend tax credit means that your company does not have to pay tax when the dividend is paid. Dividend tax rates, which are lower than Income Tax rates, are applied to the gross amount of the dividend (the dividend value multiplied by 10 and divided by 9), not the amount paid to the shareholder. This calculation enables you to work out and state the nominal 10% tax credit on the voucher.
Reporting dividends to HMRC
Because dividends are not issued and taxed through PAYE, you will have to complete a Self-Assessment Tax Return every year to report this additional income to HMRC, even if you do not have any dividend tax to pay.. Please see our ‘Tax and HMRC Requirements’ guide for information about Self-Assessment.
A director’s loan is another option for taking money out of your limited company. The loan may be:
- Money borrowed from the company by a director
- Money borrowed by the company from a director
- Reimbursement of money put into the company by a director
If you take more money out of your company than you put in - other than by way of a salary, dividends and expense repayments - the payment will be considered an overdrawn director’s loan and will require to be repaid in the future. If you lend or pay money to your company, it is also considered a director’s loan and if you later wish to reclaim money that you have invested in your company, you will also have to record the payment in the director’s loan account.
You must keep a record of any money you borrow from or pay into the company in a director’s loan account. At the end of the financial year, you must include any money you owe the company, or the company owes you, on the balance sheet in your annual accounts. There may be tax implications for you and/or the company if the loan account is overdrawn. You should consult an accountant if you wish to extract or lend money by way of a director’s loan, because it is a complex area.