Any funds your limited company pays you are considered your personal income. Unfortunately, it is not possible to pay yourself unlimited income from your limited company and not pay any personal taxes on this income. For the 2017/18 tax year the following tax bands are used:
Personal Allowance: £11,850
Basic Rate: £34,500
Basic Rate Earnings Limit: £46,350 (also called the higher earnings threshold)
For this tax year we recommend you pay yourself a salary of £8,424 (To be paid monthly at £702/month), and take any remaining earnings from your business in the form of dividends. At this salary level, there will be no PAYE or NI payable, however the salary is still high enough to count as a contributing year for your UK state pension.
From April 2018 a £2,000 tax-free dividend allowance is available for all taxpayers. You’ll pay tax on any dividends you receive over £2,000 at the following rates:
- 7.5% on dividend income within the basic rate band (was 0%)
- 32.5% on dividend income within the higher rate band (was 25%)
- 38.1% on dividend income within the additional rate band (was 30.56%)
The allowance is available to anyone who has a dividend income. The new rules ensure that tax will not be payable on the first £2,000 of the dividend income irrespective of what non-dividend income is present (such as salary). And for the avoidance of doubt, dividends received on shares held in an individual savings account (ISA) are tax free.
NOTE: Incurring the dividend tax is still more tax effective than increasing your annual salary (and incurring PAYE and NIC payments). This tax is assessed when you prepare your personal self-assessment tax return.
IMPORTANT: We strongly recommend you keep your ‘Take home payments’ page up to date with every payment you make to yourself, to ensure you can track your total personal earnings.
Allocating your Personal Earnings
The payments that you make from your company bank account to your personal bank account, need to be in the form of one of the following (with matching payment description).
- Salary – It is of the utmost importance that you pay yourself a separate monthly amount with payment description ‘Salary’, at the end of each month. This is due to the RTI filing requirements of the HMRC. If this is not done correctly, then the filing that we submit to the HMRC on a monthly basis is incorrect, and there will be penalties for incorrect filing, that you will be liable for. The only way to avoid you having to pay these penalties to the HMRC is to make sure you pay yourself correctly. We provide you with your payment schedule for the year once your annual salary has been selected.
- Expense Reimbursements – This is to cover you for the personally paid expenses that are incurred on behalf of the business. This payment needs to a have the description ‘Expense reimbursement’. Check your Personal Tax page, for a running total of expense reimbursements owing to you.
- Dividends – Are payments made out of the after tax profit of the company. These payments need to a have the description ‘Dividends’.
- Loans – Please contact your account manager for further information on taking a Loan from your limited company, or take a look at our Loan guidance.
Most of our clients make payments to themselves on the same day their invoiced amount clears into their company bank account, based on the information that is contained on the company dashboard page.
It is very important that you update your Take home payments page each time you make a payment to yourself, with the correct payment allocation, to ensure that the information our system provides you with is correct.
Regardless of company size, the main rate of corporation tax for all companies effective 01 Apr 2018 is 19%. So, your company will pay 19% corporation tax on its net profits (i.e. total turnover less all expenses).