Running your own business has many perks. From being able to take more control of your career to escaping office politics to company director pay mechanisms – there are lots of reasons to make the leap.
Another benefit is that you can pay yourself a combination of salary and dividends to reduce your tax liability – as long as your assignment falls outside IR35. But just how much should you pay yourself?
The short answer is that there's no fixed amount. As a rule of thumb, however, paying yourself a low salary topped up with dividends is the most tax-efficient way to make money.
But what do you need to consider before making your decision? Don’t worry, we’re here to help. In this guide, we’ll talk about the salary aspect. If you’d like information about dividends, please click here.
Pay As You Earn (PAYE)
This deducts Income Tax and National Insurance contributions (NIC) from an employee’s earnings. Most limited company contractors will pay themselves an annual salary below the thresholds to avoid this altogether.
The tax rates for annual earnings are:
Limited company contractors need to pay employer and employee NICs, above a certain threshold. The current rates for employer NICs are:
The current rates for employee NICs are:
As a limited company contractor, Income Tax and National Insurance are usually paid to HMRC on a quarterly basis. In addition, the introduction of Real Time Information (RTI) means you’ll also need to send certain information to HMRC each time that you or another employee is paid.
If you don’t, you might find yourself on the receiving end of an unwelcome fine or an increase to your tax bill. It’s also worth knowing that unless you have a Contract of Employment in place, there is no legal requirement to pay yourself the National Minimum Wage.
Get in touch
We understand that although tax can sometimes be a bit complicated to get your head around, you’ll still want to make sure that everything’s in order.
At ClearSky Contractor Accounting, we’ve helped thousands of professionals just like you deal with their tax and National Insurance obligations – leaving them free to concentrate on their assignments.
Our dedicated team of experts are on hand to give you the best advice, based on your own circumstances – just another example of how we’re with you all the way. So why not get in touch?