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?

Salary

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

Dividends

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

Total

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

Notes

*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

David Eaton

Posted by David Eaton

David is a Chartered Accountant and Director of SME Strategies (smestrategies.co.uk) which offers tailored support to ambitious SMEs and gives mentoring to owner managers.

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