Limited company director? Could you be earning more?

Limited company director? Could you be earning more?

Some of you may be operating your own limited company. It might be just you, maybe you and your partner/spouse or you and your employees.

So how much can you pay yourself? Did you know that from April 2011 you can pay yourself a salary of £589 a month without paying any tax or NI?

At this level:

• You get National Insurance Credits towards some benefits (eg pension)
• You must register as an employer and complete employer’s annual returns
• You don’t 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’s essential that the company has sufficient retained profits to pay a dividend.

If this rule is not followed, 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, 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 per month = £7,068 per year
• Net dividends from the company of £31,866
• Total = £38,934

Notes

*Subject to your specific circumstances. Check with your accountant whether this is best for you. This is a guide only.

**Corporation Tax has been paid on the company profits at 21 per cent until 31 March 2011 and 20 per cent from 1 April 2011. So while 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’s 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

Elaine Clark, www.cheapaccounting.co.uk

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