You are entitled to various benefits and perks as a limited company director. One of the most valuable perks is being in charge of your salary. This means you can set your salary within certain limits and take advantage of other benefits. However, knowing how to pay yourself from a limited company can be confusing if you’re unfamiliar with the process.
This article will explain how to pay yourself from a limited company. We’ll review the two major options available and help you decide which is best for you.
How to pay yourself through PAYE
PAYE, referred to as Real Time Information (RTI), is the system that most employees are familiar with. PAYE generally works by you, as director, paying yourself a salary through the payroll system. This salary is taxed at the appropriate rate, and National Insurance contributions (NICs) are deducted.
Advantages of the PAYE scheme:
- You will have a regular income taxed at the correct rate.
- You will build up a state pension record.
- You can take advantage of other benefits such as company pension contributions.
- You will have no extra personal tax bill or tax return to complete.
- You will not have to worry about late payment penalties.
Disadvantages of the PAYE scheme:
- The PAYE scheme is not as tax efficient as other payment methods, such as dividends.
- Your ability to extract cash from the company may be limited by how much you can afford
- If you are a higher-rate taxpayer, you will not be able to use your allowance fully.
- PAYE is not flexible since you are required to report on or before you pay yourself.
PAYE is a popular option because it is relatively straightforward. However, there are a few things to be aware of before you choose this method. For example, you will need to ensure that you correctly report your salary and pay the right amount of tax.
How to pay yourself through dividends
As a limited company director, you also have the option to pay yourself through dividends. Dividends are a distribution of company profits and can be an efficient way to take money out of your company, particularly if you are a higher-rate taxpayer.
This option assumes that you also own shares in your company and have sufficient profits available to make the dividend payment. If you have a separate regular job paying you through PAYE, taking advantage of dividends is generally the most popular way to pay yourself as a director. That’s because you don’t need to pay National Insurance contributions (NICs) on dividends, and the tax rate is usually lower than your marginal income tax rate.
Advantages of the dividend scheme:
- Dividends are a more tax-efficient way to take money from your company.
- You can be flexible regarding when you take dividends.
- It’s cheaper than salary, especially if you are a higher-rate taxpayer.
Disadvantages of the dividend scheme:
- You need to have sufficient company profits available to make the payment.
- You may need specific paperwork to prove to HMRC that the dividends are fair.
- You need to be a shareholder to take advantage of this scheme.
It’s possible to combine the two methods
You don’t always need to choose between PAYE and dividends – you can use a combination of the two to suit your needs. For example, you might choose to take a small salary through PAYE and top it up with dividends. This can be a good way to reduce your tax bill and still take advantage of the benefits of PAYE, such as building up a state pension.
Talk to an accountant or financial advisor if you’re unsure about the best way to pay yourself. They will be able to help you choose the most tax-efficient method for your circumstances.
At Companies Made Simple, we can help with all aspects of starting and running your limited company, including accountancy consultation and VAT registration assistance. Get in touch with our team today to discover the right limited company solution for you.