Paying Yourself Through Your Limited Company

Wednesday June 1, 2016

Who's the Boss? Putting Yourself on the Payroll.

When you're a Sole Trader, life seems simple. At least, the parts of life that involve paying yourself, that is. Whatever profits you make after tax are yours. Of course, the price you pay for that is the chance of losing everything you've got if it all collapses. The great thing about a Limited Company is the protection you get for your personal money. You're probably still not doing to do a happy little dance if your business falls apart, but at least won't have to do your dancing in the streets from now on.

Am I Legally An Employee Of My Own Ltd Company?

Running a Limited Company still means you can be your own boss, but working for yourself this way means treating yourself like an employee.

Unlike the rules for Sole Traders, HMRC treats you and your Limited Company as if they were two completely separate entities. If you want to stay out of trouble, you're going to have to start doing the same. You're no longer considered to be self-employed, either.

If you're used to the Sole Trader lifestyle, this could mean some adjustments. You'll be following different rules about tax and National Insurance, for one thing.

Do I Need To Register For PAYE If I Am Just Paying Myself?

In terms of paying yourself, even if no-one else works for you, you're going to have to act like an employer. That almost certainly means registering for PAYE and setting up a payroll.

After that, you'll have to consider how high you want your salary to be. Here, you've got some serious thinking to do. Obviously, the more you pay yourself, the more tax you'll be paying on it. In the early days of a business, a lot of Limited Company owners plough most of the profits back into it, and only pay themselves what they need to live on. That's fine to begin with, but at some point you're probably going to want a raise - and that's where you need to think your options over seriously.

Of course, how much to pay yourself is a different question entirely, and the answer will have a lot to do with how your business is doing. Have a chat with us at RIFT if you need advice on this. We'll be happy to help you plan it all out.

Is It Best To Pay Myself Through PAYE Or In Dividends?

Your two basic options for how to pay yourself boil down to PAYE and dividends. It's kind of a tightrope walk here, in terms of the best balance between them.

On the one hand, keeping your salary low brings your personal Income Tax and National Insurance payments down. Assuming you qualify for the standard £11,000 tax-free personal allowance, you might be tempted to go low on your wages.

However, your wage bill is a legitimate business cost. By bringing it down you're actually going to increase your company's profits - meaning more Corporation Tax. Any dividends you end up paying yourself will come out of your profits after paying that Corporation Tax- and if your head's spinning right now, don't panic. It just means you understand.Looking a little closer at dividends, it's worth keeping a few recent HMRC changes in mind. Since the 6th of April 2016:

  • The first £5,000 of dividend income is tax-free.
  • Basic rate tax payers pay 7.5% tax on dividends.
  • If you pay Income Tax at 40% your dividends are taxed at 32.5%.
  • If you pay Income Tax at 45% your dividends are taxed at 38.1%.

However you decide to divide up your pay between salary and dividends, you've got to know the rules on PAYE and running payrolls. You've also got to remember to deduct National Insurance from your pay. You can find most of what you need to know on the HMRC website - or get in touch with RIFT for more comprehensive and practical advice.

Remember Who The Boss Is

As weird as it sounds, working for yourself in a Limited Company means remembering who the boss is. You've got to be employer, employee and business owner all at once. It can be difficult and uncomfortable to cram all those hats onto one head, but that's exactly the kind of thing that RIFT is here for.

We'll show you the best ways to get paid through your Limited Company, and make sure the taxman never takes more than he's owed.

Phone or email with any questions you've got and keep listening out for more Voices from the RIFT...

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