Congratulations! As a Director of your own limited company you’re going places. Hopefully you’ve also earned some money and now you’re wondering, how you pay yourself? As a business owner and a Director of a Limited company you have options.
Get Paid via PAYE or Payroll
This is probably the easiest option available to you but not necessarily the best. However, many small business take a salary this way because it is relatively easy. It’s the traditional way of being paid – as you were employed (which you are) by a company. Except now this is your company.
If you are going to run your own payroll you’ll need to register with HMRC and submit monthly returns via approved software before you pay yourself. There is free software available from HMRC or you can invest in payroll software to help you. It tax efficient in terms of Corporation Tax and personally you will build up a state pension. You will have payslips to prove your income which is also useful.
Sadly it’s not so tax efficient personally and running a payroll system is not always as straight forward as it appears. There are fines for late filing and it is often difficult to put right mistakes with HMRC. PAYE is not a flexible option – you have to submit on a schedule of approved dates and before you actually take the money out.
Get Paid via a Dividend
A dividend is a share of the company’s profits and in order to take a dividend you must have profit in the company and be a shareholder. Dividends can be a tax efficient options as a Director or if you have an alternative source of income alongside being a Director. There is no requirement to have a payroll system in place to pay yourself this way, however, you are also not contributing to a state pension.
If you are taking money out this way, you will need to complete a self assessment tax return and pay personal tax on any dividends over the threshold. There is no tax deduction for your limited company with this option so you may therefore pay more corporation tax.
Get Paid Using a Combination of PAYE and Dividends
The majority of businesses will use a combination of a payroll/PAYE system and a dividend based pay-out. However, how you ascertain how much of each to apportion is specific to your own personal circumstances and there is no general rule of thumb.
However the advantages are not insignificant when you get it right; you will build a state pension fund and get a company tax deduction for the salary amount, you won’t (generally) pay National Insurance and you will have ultimate flexibility in drawing out additional funds, providing you do it properly. You’ll still need a payroll system, a PAYE registration and have to complete a tax return at the end of the year.
How Do I Decide Which Option is Right For Me?
The key is getting the balance right and maximising both pay options. And that’s where we come in!
Book a free 30-minute consultation with one of our experts to discuss your own unique situation. They are here to listen to your circumstances and suggest the best way to pay yourself and maintain tax efficiency for your company and yourself. Pay and tax are intrinsically linked and getting it right means you get to keep more of what’s in the bank whilst staying on the right side of HMRC.
We’re here to help you get it right first time. Our friendly payroll team can also help you with registering for PAYE, software choices and monthly submissions.
Call us 01883 730044 or email us oxted@moorgates.co.uk to see how we can help you.