A Director's Tax-Efficient Pay: A Case Study
How do you correctly pay yourself from your own limited company? Let's look at Ben, a contractor, who takes a small salary and the rest in dividends to minimise his tax bill.Ben's limited company has made a pre-tax profit of £60,000. Ben is the sole employee and shareholder.
Step 1: Take a Tax-Efficient Salary
Ben pays himself a salary of £12,570. This is a smart level because:
- It's an allowable expense, reducing the company's profit: £60,000 ? £12,570 = £47,430
- It's equal to the Personal Allowance, so Ben pays no personal income tax on it.
- It's above the Lower Earnings Limit for National Insurance, so he gets a qualifying year for his State Pension without actually paying any NI.
Step 2: Calculate Corporation Tax
The company now pays Corporation Tax on the remaining profit:
- £47,430 × 19% (Corporation Tax) = £9,011.70
Step 3: Pay a Dividend
The post-tax profit available to be paid as a dividend is:
- £47,430 ? £9,011.70 = £38,418.30
Ben receives this full amount as a dividend.
He has already used his £12,570 Personal Allowance on his salary.
He pays Dividend Tax on the dividend at a rate of 8.75% (as it falls within the basic rate band):
- Total personal tax: £38,418.30 × 8.75% = £3,361.60
(ignoring the small dividend allowance for simplicity)
This combined method is significantly more tax-efficient than taking the entire £60,000 as a salary.