Your Pay as a Contractor
If you’re a contractor and have decided to trade through a limited company, you have various ways of paying yourself.
This guide gives you some pointers on how to give yourself a regular tax-efficient income, while ensuring HMRC gets all the tax they’re entitled to.
The best way tends to be to pay yourself a small salary and take the balance of what you need through dividends.
How do I pay myself a salary?
Decide how much gross salary you want to pay yourself. The company will need to deduct PAYE payments from that amount. With our limited company set-up service, we put a straightforward payroll system in place for calculating the tax and NI contributions and paying them to HMRC.
The system will produce a wages summary, usually monthly, which records all the salary you’ve received. This is essential to ensure transparency, and will be useful when you complete your personal tax return.
How much salary should I pay myself?
A salary that is enough to meet your basic needs. The most tax-efficient amount is an annual salary not exceeding your personal allowance (£9,440 for 2013-14). That way you pay no personal income tax (assuming you have no other income) – but the company will have to pay around £300 in NI contributions.
How do I pay myself a dividend?
Firstly, remember the company owns the money paid to it by its customer(s), not you. The company issues the dividend. As a director, you need to be sure it’s entitled to do so. Here’s how:
- Dividends can only be paid out of net profits. This is the money left in the company after it has paid expenses, and made a provision for corporation tax. We can prepare a set of management accounts for you if you’re in any doubt how much is available;
- You transfer the dividend from the company’s trading account, which you control, into your own personal account (remember to ensure the transfer is entirely separate from any payments to you of salary or expenses – keep it all transparent);
- You complete a dividend voucher (we have a template you can use).
How much dividend should I pay myself?
As much as you need, and the company is able to pay. You need to budget for salary, expenses and corporation tax, before issuing the dividend.
Can I pay myself a monthly salary/dividend combination?
Yes, so long as there are sufficient retained profits in the company to pay the dividend from. If there aren’t, you’ll effectively be receiving a loan each month from the company, which has tax implications.
If the loan is over £5,000, it’s taxable as a benefit in kind. If it’s outstanding for longer than nine months from the end of the company’s accounting period, it attracts additional corporation tax of 25%.
Talk to us before going down this route.
How is the dividend taxed?
The following personal income tax rates apply to dividends for 2012-13:
- 10% (basic rate, up to £32,010 )
- 32.5% (higher rate, £32,011 to £150,000)
- 37.5% (additional rate, over £150,000)
Unlike salary, the dividend is not an allowable expense for the company. It’s paid out of after-tax company profit. Because it’s already been taxed, you receive a 10% tax credit. So if you take a £10,000 dividend from the company, you’ll be deemed to have received £11,111.11, net of 10% tax. This is what you record in the dividend voucher.
What this means is you pay no personal income tax on dividends from the company if you’re a basic rate taxpayer. If you’re a higher rate taxpayer, the dividend you receive is taxed at 25%. Additional rate taxpayers pay tax on their dividends at 36.11%.
What does all this mean in real money?
There are a number of differing factors that will
influence your net return. For an indication of
what these are and what it means to your personal circumstances, please give us a call today.