When you own a small business, it is crucial to know how to pay yourself in the most beneficial way from a tax point of view. Getting this wrong will cost you a lot of money!
Paying yourself tax efficiently is about setting the levels at which you pay yourself your salary at the most tax efficient points.
The assumption here is that you are a typical small business owner with a limited company and that you are both a shareholder and a director.
The basics
For many small business owners, ‘the best’ way to take money from your limited company will be a combination of :
- a small salary, plus
- the rest in dividends (from the profit).
There are many good reasons for paying yourself this way.
So, what is ‘the best’ level of salary for 24/25?
The answer to this question is very specific to your individual circumstances and business goals. You should seek specific advice from your accountant or other business financial specialist based on your actual accounts and figures.
As with many small business owners, when your business is your only source of income, you will generally look to set the annual salary at either:
- £9,100 per year
or
- £12,570 per year
Doing the math(s)
Mathematically, £12,570 is better this year in many situations, BUT it depends on many other factors including:
- Any other income you might have
- If you can claim Employment Allowance, and if you have used all of it
- Whether you want the hassle of having to pay over small amounts of tax in some months (more on this below).
As a result, you may have to also pay Employer’s National Insurance at this level.
More salary = more hassle?
Generally, the higher salary payment option can become a practical pain for a small additional saving. You will need to remember to make the payment of Employers National Insurance on some months, and time is money..
Like many other UK small business owners, you might therefore choose to pay yourself the lower figure and take further dividends instead.
How much will I actually save in tax?
Again, it depends. As paid salary is usually deductible from your company’s profits, the saving on the salaried amount itself is 19% – 25%. This depends on your level of profits. So if you paid yourself £12,570, you’d usually save about £2,380 – £3,140 in corporation tax.
In addition, you still have to consider the personal tax consequences. The good news is that if the company ‘pay’ is your only income, then there will not be any personal tax at this level. This is because most owners will have a tax-free allowance that is equal to (or exceeds) the amount of pay.
I’m still confused about how to pay myself
Ask your accountant first as they will have access to all your accounts and can advise you on what tax savings you could actually achieve.
If you don’t have an accountant, or feel you aren’t making the most of the opportunities of a salary/dividend mix with your current accountant, we can help.
FAQs
1. What is the most tax-efficient way to pay yourself from a limited company?
The most tax-efficient method often involves a combination of a small salary and the rest in dividends from the profits.
2. How should I determine the best salary level for myself in the 2024/2025 tax year?
The optimal salary level varies based on individual circumstances and business objectives. Consult your accountant for personalized advice.
3. What are the typical annual salary levels that small business owners consider for tax efficiency?
For sole income sources, common salary levels are £9,100 or £12,570 per year, but the best choice depends on various factors.
4. What factors should I consider when deciding between a higher or lower salary amount?
Consider other sources of income, eligibility for Employment Allowance, and the administrative burden of higher salary payments, including Employer’s National Insurance.
5. How much can I save in tax by paying myself a salary within the optimal range?
Savings on corporation tax can range from 19% to 25% of the salaried amount, based on the company’s profits. Personal tax implications also need to be considered.
6. What should I do if I am unsure about the best payment strategy for myself?
Consult with your accountant to leverage their expertise in analyzing your financial situation and maximizing tax efficiencies. If you lack an accountant, seek professional assistance for tailored advice.