Why should you pay yourself a salary from your company?

Author: Russell Smith
July 14, 2015

There is a single most tax efficient way to pay yourself as a limited company (assuming you don’t have any other income).  This has been similar advice for the last 6-7 years.  This advice will change slightly from 6 April 2016 but for now here is how to pay yourself from a limited company.

First, pay yourself a salary

Pay yourself a salary of £10,600 and then dividends of £28,606.

Here’s how this works….

Sales                                    £60,000

Expenses                          -£10,000

Profit                                   £50,000

Corporation tax 20%     -£10,000

Profit after tax                  £40,000

You pay corporation tax on your profits – a straight 20%.  The best way of saving corporation tax is to make sure you have all your costs included.

What is left after corporation tax is yours to take (as long as the cash is in the business i.e. all your customers have paid you).

However, you can do something clever before you take the £40,000.  You can put through a salary of £10,600.  The reason why it is £10,600 is that this means that you pay no income tax (since it is the personal allowance – the amount that everybody receives tax free).

The best bit is that you get 20% corporation tax deduction on it.  Which means you pay yourself £10,600 income tax free and then get a corporation tax saving of £2,120.

Here’s how this works….

Sales                      £60,000

Expenses             -£10,000 Salary                    -£10,600

Profit                     £39,400

Corporation tax -£7,880 (a saving of £2,120 from the above example)

Profit after tax  £31,520

 

Be warned, if you are using up your £10,600 personal allowance through other income e.g. employment, property or investment income, you do not then want to pay yourself more salary since whilst it will still get a corporation tax saving of 20% you will pay income tax and national insurance on the salary of 32%.  Not good!

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