Unlike sole traders, limited company owners are legally separate from their organisation, which means all their finances belong to the business. This means that getting paid isn’t as simple as taking money out like it’s your personal bank account. 

Instead, you need to pay yourself a salary. However, there are other ways to pay yourself that are far more tax efficient. Keep reading to find out more. 

Taking money out of a limited company as a director’s salary

As a company director, you can pay yourself a regular salary through PAYE, paying all the relevant income tax and National Insurance contributions (NICs). 

You’ll also have to pay 13.8% employer’s NICs on earnings above the NIC secondary threshold of £9,100 (as of the 2023/24 tax year). However, salary payments are a tax-deductible expense, so your company won’t have to pay any corporation tax on this money.

It’s because of all these taxes that a lot of directors take a low salary below the NIC primary threshold (£12,570 a year). That way, they don’t have to pay income tax or NICs but still qualify for the state pension and benefit entitlements as they are earning above the lower earnings limit of £6,396 a year. They then top up their payments with dividends. 

Taking money out of a limited company as dividends

As a shareholder, you can take your share of the business profit as dividend payments, which are paid out based on the percentage of the company shares you own. If you own all of them, then you’re entitled to receive all remaining income after costs, expenses and tax. 

However, unlike a salary, dividends are issued from the profit that remains after tax, although the first £1,000 of dividends is tax-free. But because dividends are taxed a lot more generously, your tax obligation will be lower if you pay yourself a low salary and majority dividends. 

For example, if you paid yourself a salary of £50,000, your tax bill for the year would total £7,386, leaving you with a take-home pay of £38,022.40. 

On the other hand, if you paid yourself a salary of £6,396 (the lower earning limit) and dividends of £43,604 (to bring your income to £50,000), you would pay £3,187.63 in tax to take home £46,812.38.

Take money out of a limited company as pensions

While pension contributions are technically your future income, they’re worth mentioning.

First, employers’ pension contributions count as allowable expenses, which means their cost is shielded from corporation tax. 

Furthermore, you can claim tax relief at the rate of your income tax band on pension contributions that do not exceed £60,000 a year. In other words, when you make contributions to your pension, the Government tops them up. 

Need help with your taxes?

What we haven’t been able to cover in this article is your reporting requirements as a director of a limited company, which can get very complex and overwhelming — so why not get in the professionals to help? 

We can help you navigate the tricky world of taxation to make sure you’re taking home your money in the most tax-efficient way possible. Get in touch with us to find out how.