Paying yourself through a limited company

Salary

Of course, the most obvious part of working through your own limited company is to pay yourself a set salary each month – this means that you not only have a stable income at a fixed amount but it is also offset against your company profits and therefore will help to reduce your Corporation Tax liability.

Most directors will choose to pay themselves up to the National Insurance threshold so that they take home more of their pay, and above the lower earnings limit so that earnings will still count as a qualifying year toward the State Pension.

Dividends

It’s very common for a limited company contractor to pay themselves a combination of salary and dividends.

A dividend is a payment drawn out of the company from its profits which is then given to its shareholders.

Dividends do not attract National Insurance, making them a more tax efficient method of paying yourself through your company, however, they are taxable depending on certain factors.

To find out more about this, take a look at our Contractor Guide to Dividends page.

Director’s loan

If you need to borrow money from your limited company and it’s not a salary, dividend, expense payment or funds that you’ve paid into/loaned to the company, then this is called a director’s loan.

There are tax implications for borrowing money from the company, which you can read about on our What is a Director’s Loan? page.

Any money taken out of the company as a director’s loan must be recorded and included on the balance sheet of your annual accounts.

Expenses

Another way in which you can ‘get money back’ in the form of a reduced tax bill, is to take advantage of any expenses made for the running of your business.

The amount you spend on business expenses is very much dependent on the type of industry you’re in and the type of work you carry out – if you need a lot of equipment or need to do a lot of travelling for example, this will all be counted toward your total expenses.

Typical allowable expenses for a contractor include:

• Travel costs – such as fuel, parking, hire charges, train/bus/taxi/airfares and accommodation while away for business reasons.
• Office costs – such as stationery, printer ink/cartridges, postage and phone/mobile/internet bills.
• Clothing expenses – if you require specific protective wear, a uniform or a costume.
• Financial costs – such as hiring an accountant.
• Training courses – but they must be related to your current line of work.
  If you work from home, you may be able to claim a proportion of costs for your heating, electricity, Council tax, mortgage interest/rent and internet/telephone use.

Do I need an accountant?

If you’re unsure of how to run your business in the most tax efficient way, or you need help and advice when it comes to salary, dividends, paperwork or filing annual accounts for example, then hiring an accountant is certainly worth it.

Here are a few key factors to take into consideration when looking for a good accountant:

• Do they specialise in contractor tax? It’s really important that you hire an accountant who specialises in working with contractors, otherwise, you simply won’t get the type of service you need – there will be many legislations and taxes that will only apply to your situation so your accountant must understand this area to advise you properly.
• Will I have my own dedicated accountant? Having one point of contact rather than being passed around a team of people is something that not all accountancy companies offer, but it really is important because it means that they will know you and your business well, which will only benefit you when it comes to providing personalised advice.
• Are they qualified? An accountant isn’t required by law to have qualifications, but it might give you peace of mind knowing that they do have them.
• Do they have a fixed monthly amount? You definitely shouldn’t assume that every accountant works on a fixed monthly fee, and if they don’t you could find yourself being charged every time you even speak to your accountant, which could certainly result in a surprise bill at the end of the year. Check that their package is inclusive of everything you need for your business, such as tax returns, VAT returns and payroll.
• Have they got a good reputation? Make sure you do your research and find an accountant that has a good reputation and can be trusted – speak to other self-employed professionals and see how happy they are with their accountant and look for reviews and forums for more information.

If you need any further information, please call one of our friendly experts on 01442 795 100 or email sophie.lewis@dolanaccountancy.com. Alternatively, contact us via live chat.