For contractors working via their own limited company, it is important to understand the best way to pay yourself, and how to draw the income from the company.
As the director and shareholder of your Limited Company, you have the option to pay yourself through a combination of salary and dividends.
Salary Payments
- Salaries are subject to income tax and national insurance contributions (NICs). Personal allowances and tax bands are applicable to salary, which affect the taxable income for each individual. The salary payments made from the company contribute to the individual's state pension entitlement.
- Usually, those working via LTD company will pay themselves a small salary and the remaining income as dividends. Higher salaries may result in increased NICs, impacting the overall tax efficiency.
Dividend Payments
For the 2023/24 tax year, the dividend tax rates will remain the same as in 2022/23. See the table below for the tax rates and associated income bands.
| Annual income | Dividend tax rate | |
|---|---|---|
| Personal allowance | Up to 12,570 | 0% |
| Basic rate | Over 12,570 to 50,270 | 8.75% |
| Higher rate | Over 50,270 to 125,140 | 33.75% |
| Additional rate | Over 125,140 | 39.35% |
- Income that is not paid as salary is classified as a dividend, which is paid from retained business profit which can be drawn by those who own shares in the company.
- Dividends are subject to dividend tax rates, which are generally lower than income tax rates. Moreover, there is no need to pay NICs on dividend income. The first £1,000 of dividends is tax-free under the dividend allowance.
Our expert accountants at Nasa Consulting can provide advice and assistance in finding the right combination that aligns with your personal circumstances, ensuring compliance with current regulations.
Still have questions?
You can get in touch with our onboarding team using the details below:
📞 01179 297 683
📧 sales@nasaconsulting.com