As a director of your own limited company, you can effectively choose how to take your “wages” from the business, most commonly in the form of salary or dividends.
To help you to decide on the most tax efficient way for you, check out two of our little tips below:
- The best thing about Dividends, is that they are not liable for National Insurance and you pay less income tax than on a salary! This makes this option attractive to a lot of directors. However, despite the lower Tax Rates, only your first £2000 of dividends are tax free.
For the 2021-2022 tax year, the dividend tax rates are below*:
| Taxable Dividend Income | Tax Rate |
| £2,000 or less | 0% |
| £2,000 – £37,500 | 7.5% |
| £37,501 – £150,000 | 32.5% |
| Over £150,000 | 38.1% |
* Tax rates are liable to change every year, so to get the latest dividend tax rates always visit https://www.gov.uk/tax-on-dividends
- While your salary is liable for higher Income Tax and National Insurance, the government does offer a £12,500 tax free personal allowance*, which is always good to take advantage of! However, as you pass the National Insurance thresholds, you become less tax efficient.
*Correct as of 2021/2022
Conclusion?
While it’s not right for everybody, a lot of Directors have found it most tax efficient to pay themselves through a combination of both Dividends and Salary. This way they are able to make the most of their tax-free allowances and reduce their tax liabilities.
When it comes to paying yourself, it can be a little difficult to navigate the tax rates and legislation, and decide which route is best for you.
Don’t worry, we’re here to help, get in touch today for a quick chat and feel your stresses disappear! Or, check out our Limited Company page to see how we can help your business thrive!