The most efficient way to pay yourself as a limited company

min read

The most efficient way to pay yourself as a limited company

How to withdraw money from a limited company

As a limited company, your business is treated as a separate legal entity to you and other owners and is legally classified as an ‘individual’ in the eyes of the law. This means that all finances belong to the business itself - so you can’t just withdraw money from your business the same way you would from your bank account. There are several ways you can withdraw money from a limited company, which we’ll explore below.

Salary

Wondering how to pay yourself a salary from a limited company? As company director, you can pay yourself a salary through HMRC’s Pay As You Earn (PAYE). But first, your limited company needs to be registered with HMRC as an employer, which you can do online. Remember, depending on how much you pay yourself, you may need to deduct tax and national insurance contributions and pay them to HMRC.

As a limited company, your business won’t need to pay any Corporation Tax on salary payments, as they are seen as business expenses and are tax-deductible.

But your business will need to pay 13.8% employer’s National Insurance contributions (NIC) on your annual salary earnings above the secondary threshold of £9,100 (2024-25 tax year).

To minimise your tax bill, you may choose to pay yourself a salary up to the NIC primary threshold (£12,570 a year) to avoid needing to pay Income Tax and NIC. You can then take the rest of your income as dividends, which we’ll go into more detail on later.

How much to set as a limited company’s director salary

Wondering how to pay yourself a salary from a limited company? To minimise the amount of income tax due, many directors choose to pay themselves a small salary from their business. For example, if you pay yourself up to £12,570 per year (as long as you have no other relevant income within the tax year) you can avoid paying income tax and NIC. You can then choose to take the rest of your income as dividends, with the first £500 being tax-free in line with the annual dividend allowance.

If you pay yourself between £12,571 and £50,270 you’ll pay 20% income tax, and 40% if you pay yourself between £50,271 and £125,140. Anything over £125,140 is charged at 45% income tax.

Don’t worry - if you only pay yourself up to the primary threshold of £12,570, you’ll still qualify for the State Pension because you’ll be earning above the lower earnings limit of £6,396 per year.

Dividends

If you’re also a shareholder, you can choose to take dividend payments on top of your salary. There’s a tax-free dividend allowance of £1,000 for the 2023-24 tax year, meaning you can take up to £1,000 in dividends before needing to pay income tax on it. This is on top of the personal allowance threshold of £12,570.

Once you exceed this amount, the amount of tax you’ll pay will depend on your tax band, which is calculated by adding your total dividend income for the year with your director’s salary and any other income you receive.

Basic-rate taxpayers: 8.75% tax (if you receive dividends over the personal allowance, up to the value of £37,700)
Higher-rate taxpayers: 33.75% tax (if you receive dividends over £37,701, but less than £150,000)
Additional-rate taxpayers: 39.35% tax (if you receive dividends over £150,000)

Steph Gemson, Chartered Tax Advisor at TaxGem, explains, ‘Directors who are also shareholders of their owner-managed business, may take dividends via their shareholding, as long as the company has sufficient distributable profit reserves.

‘Dividends benefit from lower personal tax rates (of just 8.75% up to £50,270, 33.75% up to £125,140 and 39.35% thereafter), with no National Insurance. So, although they are not considered to be tax deductible in the company, there can be some income tax savings for the recipient. Dividends will need to be declared on the shareholders’ personal tax return and tax due on them paid over to HMRC on the 31 January each year, following the end of the tax year.’

Director’s loans

Another option when it comes to paying yourself from your business is to take out a director’s loan. However, it’s important to note that a director’s loan is a form of borrowing from your company, rather than income you’ve earned through your work. This means that just like other forms of borrowing, the funds taken as a loan will need to be repaid. Director’s loans are typically used to cover short-term or one-off expenses such as emergencies.

When it comes to tax implications, should you not repay your loan within nine months and one day of the company’s year-end, you’ll owe a significant amount of tax. If you repay the loan within nine of the end of your Corporation Tax accounting period, you’ll need to show the amount owed at the end of the accounting period when you prepare your tax return by using form CT600A. If the loan was more than £5,000 and you took out another loan of £5,000 or more up to 30 before or after you paid it off, you’ll pay Corporation Tax at 33.75% of the initial loan, and 32.5% if the loan was made before April 6 2022. The same amount of tax applies if the loan was more than £15,000. Once you’ve repaid the original loan, you can reclaim the Corporation Tax but not the interest.

Should you not repay the loan within nine months of the end of your Corporation Tax accounting period, you’ll pay Corporation Tax at 33.75% of the outstanding balance or 32.5% if you took out the loan before April 6 2022. Interest on the Corporation Tax will be added until you’ve paid Corporation Tax, or repaid the loan. We appreciate the tax rules around director’s loans may sound complicated, so for more details take a look at the government’s information on director’s loans.

Expenses reimbursement

Made purchases ‘wholly and exclusively’ for your business? You may be able to claim these costs as legitimate business costs. This means you’ll receive tax relief on these expenses and you’ll also be able to reimburse yourself for the cost.

Types of expenses you may be able to claim for include:

Office costs such as broadband bills
Equipment
Business insurance
Travel cost (business miles)
Professional services
Software costs
Client entertainment

Do pension contributions reduce your taxable income?

As company director, making pension contributions could save you and your limited company a significant amount of tax. By choosing to take a smaller salary and the rest of your income in dividends, the amount of tax relief you receive on pension contributions from the government is likely to be very little. This is because dividends aren’t seen as ‘relevant UK earnings’, so the tax relief you receive is based on your salary alone. But by contributing to your pension directly from the company, your pension contributions will immediately enter a tax-free environment, so there's no need for tax relief. Your contributions will be treated as a business expense, reducing your business’ taxable profits and your Corporation Tax bill.

It’s important to note that there’s a limit on how much you can contribute towards a pension each year, to still qualify for tax relief. This is usually £60,000 per year, but may be less if your income exceeds certain thresholds. For higher earners, the annual allowance is reduced by £1 for every £2 you earn over £260,000.

Paying yourself as a limited company

There are several ways to pay yourself as a limited company, and a combination of salary and dividends is one of the most tax-efficient strategies to optimise your income, while adhering to tax regulations.

Looking to start your own business? We’d love to play a part in your business journey. With us, you can form your company for free, with advice and support every step of the way. Form your limited company today and prepare for an adventure like no other.