How to pay yourself as a limited company director
When you run a limited company it’s up to you how you pay yourself. You have a few options, and there are different advantages and benefits all of them:
- Taking a regular salary
- Paying yourself in dividends
- A combination of salary and dividends
This guide will take you through what you need to know about each option.
Get paid with a salary
If you take a salary as a limited company director it will be paid in the same way as it would to an employee. That means you need to follow the rules of running a payroll.
Running a payroll
If you’re running a payroll you need to operate PAYE as part of your payroll. PAYE is the HMRC system to collect Income Tax and National Insurance from employment.
You can do PAYE by either paying a payroll provider to do it for you, or doing it yourself using a payroll software.
When running a payroll you have certain reporting and tax filing responsibilities under HMRC’s Real-Time Information (RTI) rules. It’s really important to fulfil these requirements otherwise you could be fined.
Tax on your salary
When you receive a salary you’ll need to pay income tax on your earnings and National Insurance contributions, providing your salary is over certain thresholds.
You only pay income tax on salary above your Personal Allowance, which is currently £12,500. There are also separate thresholds for National Insurance contributions.
A bonus of taking a salary is that it’s counted as an allowable business expense, so it lowers the Corporation Tax paid by your company.
Get paid in dividends
Dividends are payments you might receive if you are a shareholder in your company. Dividends come from the profit of the company, and they are normally paid annually.
Unlike paying out a salary, there’s a specific process for paying out dividends that involves holding a meeting and keeping minutes, filling in paperwork and issuing dividend vouchers.
Tax on dividends
You will pay tax on your dividend payout, not your company. The dividend allowance for the current tax year (6 April 2020 to 5 April 2021) is £2,000, so you don’t pay tax on payouts under this amount.
Dividends have specific tax rates that depend on your income tax band. You can find out more about tax on dividends here.
Manage your finances with Bokio
Keeping a close eye on your finances is really important. Using an accounting software like Bokio is a great way to see how your business is performing so you can budget for the future.
With Bokio accounting software, you can do your bookkeeping, invoicing, and manage your finances in the same place. We have everything you need to help you prepare for your Self Assessment tax return, submit your VAT Return for Making Tax Digital and keep the right financial records. If you need an extra hand, we can help you find an accountant to work with.
Accounting is kept simple with Bokio, so you have more time to spend running your business.