Structuring your business as a limited company can often be a good choice for the self-employed. But, when you as the director/business owner can set your own salary, how much should you pay yourself? What’s the most tax efficient way to take a salary from your limited company and how much should it be?
How should I pay my Limited Company salary?
First of all, it’s almost always best to take a salary from your company, don’t be tempted to not pay yourself. Your salary is an allowable business expense, so it lowers the amount of Corporation Tax your company pays. A good thing. If the salary is above the Lower Earnings Limit (currently £6,396 for 2022/23), you accrue qualifying years towards your state pension. Another good thing!
For many, paying a low salary (alongside paying dividends on your shares) from the limited company is the best solution. But there are a number of tax and benefit considerations to look at first.
Advantages of paying myself a low salary
Tax savings – Providing that you have no other sources of income, paying yourself a low income will mean you do not have to pay Income Tax or National Insurance Contributions (NICs) on that salary.
As a UK taxpayer, you have an annual Personal Allowance. For the 2022/23 tax year, any income you receive up to £12,570 is free from Income Tax.
It’s important to note though that when setting your salary, you will also need to consider the National Insurance (NI) thresholds, which are currently lower than the Personal Allowance.
The NI thresholds
The Lower Earnings Limit – you’ll retain your State Pension contribution record if your salary is set above this level.
The National Insurance (NI) Primary threshold – if your salary is below this level, you won’t need to pay any NIC as an employee.
The National Insurance (NI) Secondary threshold – if your salary is below this level, your limited company won’t need to pay any employer’s NICs as your employer.
Your pension – If you pay yourself an annual salary above the NI Lower Earnings Limit but below the NI Primary threshold (currently £12,570 in 2022/23), you won’t pay employee’s NI contributions. This salary will count toward your State Pension contribution record however.
Tax efficient option – Your limited company would have to pay employer’s NI contributions on any salary you take that is above the NI Secondary threshold, which is lower, at £9,100. So arguably, the most tax efficient salary to pay yourself for the 2022/23 tax year, is £758 per month or £9,100 per year (the NI Secondary threshold amount).
Disadvantages of a low or no salary
Maternity benefits – You may not qualify for maternity benefits and pay if you’re not ‘employed’ at your business.
Reduced medical cover – Pay outs are calculated on your earnings under some policies.
Mortgage and loan applications – Obtaining high mortgages can be challenging when you’re self employed. You may need to meet certain criteria and a low or no salary will make that difficult. There are ways around it and again, we can recommend mortgage advisers who are experienced with self-employed clients. As with mortgages, loans will require proof of earnings for repayment. So, having a lower salary could limit the amount of money you can borrow and the terms of any loans you take.
Further advice on Limited Company structures
Knowing the best way to structure your business is important for your finances. If your taxable business profits are fairly low, less than £20,000, it’s probably best to remain as a sole trader. Speak to your accountant about the costs associated with running a limited company. They will be able to advise you on the best business structure and provide more tailored advice on the level of salary to take from your company.
If you’re a landlord looking to move your property portfolio into a limited company, there are even more things to consider. This article offers buy-to-let landlords some guidance on the pros and cons.
About Mark Ingle
Owner-manager business specialist, Mark Ingle is key to building relationships with clients at the Chelmsford office. “I like to see clients enterprises grow and succeed.” Mark explains, “The team here has a lot to offer and I can see a lot of new businesses responding to that.”
Having worked for accountancy practices in London and Essex, Mark has worked with a range of companies varying in size. For Mark, THP stands out for its “local firm approach with the resources of a larger practice.”
Although a keen traveller, Mark is focused on giving his clients at THP the highest service, “Right now, I aim to help the clients we have to the best of my ability which will help me attract more of the right clients in the future.”
Mark’s specialist skills:
- Annual and Management Accounts
- Tax and VAT
- Strategy and Business Planning
- Marketing and Sales
- Business Development