If you’re a company director, you have a number of options for drawing income from your company. Mainly, it’s a choice between whether you pay yourself a salary, or you take dividends as your income – or you might choose a combination of the two. On top of this, you can supplement your income with pension contributions from your company.
In this post we’ll weigh up each option, including the tax implications, to help you decide which approach is right for you.
Please note – this advice applies to anyone who runs a company of any size.
Should I Take a Salary From My Company? Pros and Cons
You can pay yourself a salary through putting yourself on your company’s payroll. How much salary you draw is entirely up to you. Just bear in mind that, if you pay yourself an amount above the personal income threshold, you will have to pay tax and National Insurance Contributions on your salary.
There are some benefits to taking a salary:
- If you draw a salary from your company, you will receive income even if your business isn’t making a profit.
- You’ll build up qualifying years towards your state pension, and you can make higher personal pension contributions too.
- Drawing a salary allows you to access certain benefits, including maternity benefits. You may also find it easier to apply for mortgages and insurance policies, as you’ll be able to provide a reliable figure for your income.
- As a salary is an allowable business expense, paying yourself a salary can reduce the amount of corporation tax you have to pay.
However, there are also downsides to taking a salary:
- Both you and your company will likely have to pay National Insurance Contributions.
- You’ll have to pay a higher rate of income tax than you would with dividends.
Should I Take Dividends From My Company? Pros and Cons
If you take a dividend from your company, then you’ll essentially pay yourself a share from your company’s profits. As a company director, you have a tax-free dividend allowance on top of your personal allowance. At the time of writing, the dividend allowance is £2,000. Added to the current personal allowance, this means you can pay yourself up to £14,570 in dividends before you have to pay any income tax.
There are benefits to taking dividends from your company:
- Neither you nor your company will need to pay any National Insurance Contributions.
- You’ll pay lower income tax rates, so you can greatly reduce your income tax bill. For example, the rate of income tax for salaries is 20 – 45%, depending on your income. For dividends, the rate can be as low as 8.75%.
Yet there are some downsides to taking dividends from your company:
- Dividends are only ever paid out of profits – that is, the money that’s left over after your company’s paid all of its liabilities, including its corporation tax bills. So if your company’s not making a profit, you won’t get any income at all.
- Because of this, if you rely too much on dividends, it can make your income unpredictable. This might make it difficult to apply for mortgages and other financial services.
- Taking out a dividend that’s not covered by your profits counts as a director’s loan. By law, these must be repaid. So in some cases, paying yourself in dividends could mean that you’re merely borrowing money from your company.
- You will not be able to get any tax relief on any personal pension contributions, as dividends do not count as “relevant UK earnings”.
Taking Pension Contributions From Your Company
As well as paying yourself via a salary and dividends, you can also choose to receive pension contributions from your company.
Paying yourself employer pension contributions will not add to your personal income, which means that any contributions you make will not affect your tax bill. They also count as an allowable business expense, which means they can help you make savings on your corporation tax bill.
Plus, your employer pension contributions are not linked to the size of your salary, which can hugely increase the amount of pension contributions you can make in a year.
Salary, Dividend, Pension Contributions – Which Approach is Right For Me?
Most company directors pay themselves via a combination of a salary and dividends, with additional pension contributions to help them plan for a long-term.
The approach that works best for you will depend on:
- Your company’s profits. If these aren’t very high, or if your company’s yet to make a profit, then you will not be able to rely on dividends for a reliable income.
- Your tax situation. As we’ve seen, the approach you take can implicate both your personal tax bill and your corporation tax bill.
- Your personal situation. You may be looking to apply for a mortgage, and you may wish to access certain state benefits, such as the state pension or maternity benefits. In which case, it may be best to get an income you can depend on with a salary.
Further Considerations For Company Directors
The way you choose to pay yourself can bring significant tax benefits for both you and your company. But you can also get full tax relief for some forms of insurance. Examples include:
- Public liability insurance.
- Professional indemnity insurance.
- Contents insurance.
- Employer’s liability insurance.
We specialise in providing insurance to company directors of businesses of all sizes – whether you’re an independent sole trader or you’re running a limited company. We tailor insurance to meet your needs and protect the specific risks you face as a company director.
If you have any questions or would like to discuss your options, please contact our Tapoly team at firstname.lastname@example.org, call our helpline on +44(0)207 846 0108 or try our chat on our website.