What to pay myself as a director of my limited company?

For the 2021/2022 tax year (from 6 April 2021 to 5 April 2022), the most tax efficient annual salary is £8,840. Any additional income you take out of your business can then be paid through dividends. (This is assuming that you had no other income from other jobs or businesses).

In other words, the most tax efficient thing to do is to pay yourself a minimal salary and then the remaining amount through dividends.

Why is this?

By paying yourself a salary of £8,840 you continue to pay employee National Insurance contributions. But as an employer, you will not be paying any National Insurance contributions. This enables you to be eligible for the State Pension.

From a limited company perspective, your salary also counts as a tax deductible expense. At the current corporate tax rate of 19%, paying a salary of £8,840 to the director saves £1,679 in corporation tax. There are no such savings if dividends are paid. Also, by paying a salary of £8,840 you are ensuring another qualifying year for the state pension is added.

But I have other income?

If you have another salary, rental income, or pension, then you may want to avoid paying a salary altogether. These cases are more complex and require specific planning to maximise your tax efficiency.

Also read: How Much Tax Will You Pay On A Second Job

What if I want to pay myself more?

You can go for it. But you may end up paying more National Insurance (both as an employee and as an employer) if your income exceeds £8,840. Once your income is above £12,570, you exceed your Personal Allowance which means you will pay the usual income tax rates. The dividend tax rates are lower than the income tax and National Insurance rates, altogether.

In other cases, you may want to pay more through a salary due to minimum wage requirements or if the company is making a loss. Dividends can only be paid out if the company is making a profit.

There are a number of different ways to pay yourself through a limited company. All will depend on your personal situation. This is general information and does not constitute tax advice. If you would like personal advice, reach out to the Taxd team.

Also read: How To Claim Tax Expenses For Tools And Vehicles If You're A Sole Trader