Contractors Limited Company Limited Company Director Pay

Salary

A salary is the money paid to the limited company director through a standard PAYE scheme. It appears in the limited company accounts and as a legitimate company expense will reduce the limited company's corporation tax.

A director has to pay income tax and employee National Insurance Contributions (the limited company pays employers National Insurance Contributions).

Contractors Limited Company will discuss the level of salary individually with each contractor. The best salary level will be dependent on your specific circumstances and will take into account: National Minimum Wage, pension & other personal criteria.

Dividends

If a limited company makes a profit dividends are paid to the shareholder(s) as a financial reward. A dividend also generates a tax credit(s) that covers the basic rate personal tax liability.

Dividends are tax efficient because a director can earn £43,875 (tax threshold of £37,400 plus the personal allowance of £6,475) in any tax year without paying income tax or National Insurance Contributions.

The highest rate of dividend tax is 22.5% (32.5% over £150,000) and there is no National Insurance Contributions on dividend payments.

Strategic Planning

The most tax efficient means of taking money out of a limited company will be a combination of salary and dividends. It will mean taking advantage of the lower tax rate (up to £43,875) as well as considering all of a director's income including investment income, bank interest and any other investment sources.

It is not unusual for a director of a limited company to have their partner as a shareholder and pay them a dividend, as well as salary in certain situations. The spouse will receive a dividend whenever the limited company makes such a payment.

Risk

Contractors Limited Company will advise the contractor how their income should be split between salary and dividend. The contractor should consider what level of risk they are prepared to take. A relatively high salary will reduce risk.

A lower risk approach would be to set the salary at a level that equates to the amount of money needed to maintain a chosen standard of living without the need to rely on a dividend payment.

Salaries have to be realistic to cover your basic needs. HMRC don't want to lose huge sums of tax that aren't paid on National Insurance Contributions. If they think you are manipulating the tax system unfairly they will make you pay Class 1 National Insurance Contributions on your dividend.

This scenario will only happen when HMRC can prove the dividend is ‘disguised remuneration' to flout the tax laws.

Pensions - State

As a UK National entitled to receive the state pension you are obliged to have National Insurance Contribution credits for 30 qualifying years.

With an annual salary of £5,720 the state pension will receive that year's credit but no National Insurance Contribution will be paid by the company director - so making them "free" contributions. A salary any lower will forgo the corresponding National Insurance Contribution credit.

Pension - Personal

Personal pension contributions are restricted to basic rate tax relief. Company pension schemes are not restricted come with total tax relief.

National Minimum Wage

With an employment contract comes the National Minimum Wage. The minimum salary payment for an eight hour day is £47.44 (assuming you are over 21). When a director is claims Working Tax Credits or other benefits like statutory sick pay the National Minimum Wage rules apply.