Many of you may be operating your own limited company.
It might be:
- Just you on your own
- You and your partner / spouse
- You and employees
One thing is sure – you have a company to earn a living and build a business.
So how much can you pay yourself?
From April 2011 you can pay a salary of £589 / month without paying any tax or NI.
At this level:
- You do get National Insurance Credits towards some benefits e.g. pension
- You do have to register as an employer and complete employers annual returns
- You do not 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 is essential that the company has sufficient retained profits to pay a dividend.
If this rule is not followed then 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 at all, 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 / month = £7,068 / year
- Net dividends from the company of £31,866
- Total £38,934
*subject to your specific circumstances. We recommend you check with your accountant that this is best for you. This is a guide only and should not be relied upon for your tax planning.
**Corporation tax has been paid on the company profits at 21% until 31 March 2011 and 20% from 1 April 2011. So whilst 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 is 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