Limited company director? Could you be earning more?

By: Elaine Clark

Date: 14 March 2011

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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