How To Pay Yourself From a Limited Company

You are entitled to various benefits and perks as a limited company director. One of the most valuable perks is being in charge of your salary. This means you can set your salary within certain limits and take advantage of other benefits. However, knowing how to pay yourself from a limited company can be confusing if you’re unfamiliar with the process.

This article will explain how to pay yourself from a limited company. We’ll review the two major options available and help you decide which is best for you.

Key Takeaways

• Distinguish between personal and company funds. A limited company is a separate legal entity, meaning any income it generates belongs to the business rather than the directors personally until it is officially distributed.
• Use the PAYE system to draw a regular salary. Registering as an employer with HMRC allows you to pay yourself a salary, which counts as a deductible business expense and helps build your National Insurance record for state pension purposes.
• Distribute dividends from company profits after tax. Dividends are often more tax-efficient as they do not attract National Insurance contributions, but they can only be issued if the company has sufficient retained profits after Corporation Tax.
• Combine salary and dividends for an efficient pay structure. Many directors choose to take a small salary up to the National Insurance threshold and supplement their income with dividends to minimise overall tax liability.
• Follow strict administrative procedures for all payments. You must hold board meetings and produce dividend vouchers for every distribution, even if you are the sole director, to ensure your records remain compliant with UK law.
• Register for PAYE before making your first salary payment if your earnings exceed the relevant threshold. For most directors drawing a meaningful salary, HMRC requires real-time information reporting through the PAYE system for every pay period. However, if you pay yourself below £5,000 per year and have no other employees earning above this level, you may not be required to formally register as an employer, making it worth confirming your position with an accountant before setting up payroll.

How to pay yourself through PAYE

PAYE, referred to as Real Time Information (RTI), is the system that most employees are familiar with. PAYE generally works by you, as director, paying yourself a salary through the payroll system. This salary is taxed at the appropriate rate, and National Insurance contributions (NICs) are deducted.

Advantages of the PAYE scheme:

• You will have a regular income taxed at the correct rate.
• You will build up a state pension record.
• You can take advantage of other benefits such as company pension contributions.
• You will have no extra personal tax bill or tax return to complete.
• You will not have to worry about late payment penalties.

Disadvantages of the PAYE scheme:

• The PAYE scheme is not as tax efficient as other payment methods, such as dividends.
• Your ability to extract cash from the company may be limited by how much you can afford
• If you are a higher-rate taxpayer, you will not be able to use your allowance fully.
• PAYE is not flexible since you are required to report on or before you pay yourself.

PAYE is a popular option because it is relatively straightforward. However, there are a few things to be aware of before you choose this method. For example, you will need to ensure that you correctly report your salary and pay the right amount of tax.

How to pay yourself through dividends

As a limited company director, you also have the option to pay yourself through dividends. Dividends are a distribution of company profits and can be an efficient way to take money out of your company, particularly if you are a higher-rate taxpayer.

This option assumes that you also own shares in your company and have sufficient profits available to make the dividend payment. If you have a separate regular job paying you through PAYE, taking advantage of dividends is generally the most popular way to pay yourself as a director. That’s because you don’t need to pay National Insurance contributions (NICs) on dividends, and the tax rate is usually lower than your marginal income tax rate.

Advantages of the dividend scheme:

• Dividends are a more tax-efficient way to take money from your company.
• You can be flexible regarding when you take dividends.
• It’s cheaper than salary, especially if you are a higher-rate taxpayer.

Disadvantages of the dividend scheme:

• You need to have sufficient company profits available to make the payment.
• You may need specific paperwork to prove to HMRC that the dividends are fair.
• You need to be a shareholder to take advantage of this scheme.

It’s possible to combine the two methods

You don’t always need to choose between PAYE and dividends – you can use a combination of the two to suit your needs. For example, you might choose to take a small salary through PAYE and top it up with dividends. This can be a good way to reduce your tax bill and still take advantage of the benefits of PAYE, such as building up a state pension.

Talk to an accountant or financial advisor if you’re unsure about the best way to pay yourself. They will be able to help you choose the most tax-efficient method for your circumstances.

At Companies Made Simple, we can help with all aspects of starting and running your limited company, including accountancy consultation and VAT registration assistance. Get in touch with our team today to discover the right limited company solution for you.

FAQs

What is the most tax efficient way to pay myself from a limited company?

The most tax efficient approach usually involves taking a small salary and the remainder of your income in dividends. By keeping your salary at a specific level, you can avoid or minimise National Insurance contributions while still qualifying for the state pension. Dividends are then paid out of company profits, which generally attract a lower tax rate than regular employment income.

How do I register for PAYE as a company director?

You can register for PAYE online through the HMRC website, and you must do this before your first payday. As a director, you are technically an employee of your own company, so the business must be set up as an employer to report your earnings. Once registered, you will receive an employer secondary reference and an accounts office reference, which are needed for your regular payroll submissions.

Can I pay myself dividends if my company is not making a profit?

No, you cannot legally pay dividends if the company does not have sufficient retained profits after Corporation Tax has been deducted. If you issue a dividend without enough profit, it is classified as an illegal dividend, which can lead to serious tax complications and personal liability issues. You must always review your latest management accounts to ensure there is enough surplus to cover the distribution.

What is the difference between a director's salary and a dividend?

A salary is a fixed payment made to you as an employee, which is subject to Income Tax and National Insurance but counts as a tax-deductible business expense. Dividends are a distribution of the company’s post-tax profits to its shareholders. Unlike a salary, dividends do not attract National Insurance, but they are not considered a business expense and cannot be used to reduce your Corporation Tax bill.

Do I need to keep paperwork when I pay myself a dividend?

Yes, you must follow a formal administrative process every time you declare a dividend, even if you are the only director and shareholder. You are required to hold a board meeting to declare the dividend and record this in the form of meeting minutes. You must also provide each shareholder with a dividend voucher that shows the date, the company name, and the amount being paid.

What happens if I take money out of the company without using PAYE or dividends?

If you take money out that is not processed as a salary or a dividend, it is usually recorded as a director's loan. While this is permissible for short periods, if the loan is not repaid within nine months of your company's year-end, the business may have to pay a specific tax known as S455 tax. It is almost always better to plan your withdrawals through formal payroll or dividend distributions to avoid unexpected tax charges.