A key advantage of running a Limited Company is the opportunity for tax planning and to split your income across different allowances and thresholds. Unlike a permanent employee or sole trader, who are taxed across their fixed personal tax bands and have no room to manoeuvre, a Limited Company gives a couple of different avenues to get your money out tax efficiently.
You will nearly always want to pay yourself a salary – drawing a fixed monthly amount out of your company. Not only does this give you a stable ‘base’ income, it is offset against your company profits (reducing your Corporation Tax liability) and allows you to make best use of your personal tax allowance, as well as providing a qualifying year for your State Pension.
The most common way to draw a salary is to pay yourself up to the National Insurance threshold. As of 2017/18, this means drawing £680 per month, or £8,160 per year. This way, you have zero liability for National Insurance and personal tax – more on that later – so you take home 100% of the salary.
Since you are above the Lower Earnings Limit – £490 per month – your earnings will still count as a qualifying year for the State Pension, even if you are not paying any National Insurance.
Running a monthly payroll requires a fair bit of administration. If you have specialist knowledge you can do this yourself, but it is one of the tasks most contractors delegate to their accountant.
It is also common to pay a partner or spouse a salary, for the help their provide to you in running your company. They will be able to take advantage of their own personal tax allowance, so there won’t be anything additional to pay and they can take out 100% of the money paid to them, after tax.
It is important to note that anybody on your company payroll must be doing work for the company, otherwise you can fall foul of the taxman. Leaving office administration and general duties to your partner is common and allows you to get on with your contract work.