To pay yourself through a limited company, you would normally receive a monthly director’s salary through PAYE, then take dividends from shares (if you are a shareholder) when the company has available profits. Unlike sole trader businesses, you cannot keep or spend company money as if it is yours. Companies are legally and financially separate from their directors and shareholders, so you must follow specific procedures to remove money from your company.
The most common way to pay yourself through an LLP is to take monthly ‘drawings’ based on your profit share - normally one twelfth of your agreed annual profit share. These drawings are paid from the LLP’s business bank account and deposited into LLP members’ bank accounts, or they may be paid by cheque. However, some partners may be classed as salaried members, in which case they will be paid and taxed though PAYE.
Directors are normally paid a salary through PAYE as part of the company payroll, even if they are the owners of the company. They are treated as employees for tax purposes. Ideally, you want to structure your remuneration in a way that is the most tax efficient. The best way to achieve this though a company is to take a monthly salary below the threshold for National Insurance liability, then top up your income with dividends from available profits.
Dividends are portions of profit that a limited by shares company pays to its investors and members (i.e., shareholders), based on the value of their shareholdings. They can be paid at any time, whether annually, biannually, quarterly, monthly, or on an ad-hoc basis. However, a company may only distribute dividends if it has surplus income after it’s accounted for all other liabilities, such as tax.
Dividends are only paid to directors if they are also shareholders in the company. In many cases, directors do hold shares in the companies they manage. If you set up a company, take at least one share and appoint yourself as a director, you will be able to pay yourself a director’s salary and take dividends from your shareholdings.
Through a limited company, you will pay Income Tax on your director’s salary. You will pay this tax through HMRC’s Pay As You Earn (PAYE) system on each payday. To do so, your company must be registered as an employer. You will not pay Income Tax on any dividends received from the company, but you may have to pay dividend tax through Self Assessment.
Through a limited company, you will pay National Insurance (Class 1) on your director’s salary earnings above £797/month (Primary Threshold), and the company will pay 13.8% employers’ National Insurance on your salary earnings above £737/month (Secondary Threshold). However, you will not pay National Insurance on dividend income.
You will pay tax on your director’s salary through HMRC’s Pay As You Earn (PAYE) system, which your company will operate as part of its payroll. Income Tax and National Insurance (if applicable) will be deducted at source and paid directly to HMRC.
You will not pay Income Tax on dividends, but you may have to pay divided tax on dividend income above a certain amount. The first £2,000 of dividends in a year will be tax free, on account of the annual Dividend Allowance. Additionally, you will not pay tax on dividend income that’s within your tax-free Personal Allowance of £12,750/year.
Tax on dividends is paid through Self Assessment. HMRC will calculate the amount you owe, if any, based on your total earnings for the year, which you report in your Self Assessment tax return. Current dividend tax rates are 7.5% (basic rate taxpayer), 32.5% (higher rate taxpayer), and 38.1% (additional rate taxpayer).
You can claim expenses through a company, but only those which are incurred wholly and exclusively for business purposes. This could be anything from stationery costs and broadband to travel costs, equipment,and the use of your home as an office. Provided you keep accurate accounts and all relevant paperwork, you could significantly reduce your Self Assessment and Corporation Tax bills by claiming all allowable expenses.
When a director borrows money from their company or a company borrows money from a director, the transfer of funds is classed as a director’s loan. These loans must be accurately recorded in a director’s loan account. Due to the potential for high tax liabilities, this type of loan should only be used as a form of short-term borrowing, for example, to cover startup costs or unexpected bills, or to alleviate temporary cash flow issues.
Included with your package is a bank account from one of our partners.