Here is a very useful guest blog from Elaine Clark, MD of Cheap Accounting, an innovative and cost-effective accounting practice for small businesses.
Limited company director – Do you know what your take home pay could be!
Many of you may be operating your own limited company.
It might be:
- just you on your own
- you and your partner / spouse
- you and employees
One thing is sure – you have a company to earn a living and build a business.
So how much can you pay yourself?
From April 2011 you can pay a salary of £589 / month without paying any tax or NI.
At this level:
- You do get National Insurance Credits towards some benefits e.g. pension
- You do have to register as an employer and complete employers annual returns
- You do not have to pay any tax or national insurance
- This is a perfectly legal and acceptable way of paying yourself from your company
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 is essential that the company has sufficient retained profits to pay a dividend.
If this rule is not followed then 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 at all, 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
On an annual basis you can pay:
- salary of £589 / month = £7,068 / year
- Net dividends from the company of £31,866
- Total £38,934
*subject to your specific circumstances. We recommend you check with your accountant that this is best for you. This is a guide only and should not be relied upon for your tax planning.
**Corporation tax has been paid on the company profits at 21% until 31 March 2011 and 20% from 1 April 2011. So whilst 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 is 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 is Managing Director of Award Winning online accountancy practice CheapAccounting.co.uk. CheapAccounting.co.uk provides cost-effective accounting to small businesses; combining online bookkeeping software with consultations with qualified accountants. Sokratis Papafloratos of Trusted Places, part of Yell.com said this about Elaine and CheapAccounting.co.uk:
“By offering free advice and industry insight, company founder Elaine Clark has positioned herself and her business as a thought leader within the industry and a trusted adviser to accountancy firms.”