Working Through a Limited Company: Getting Paid
Taking money out of the company
There are four principal ways of taking money out of a company:
- As expenses
- As salary
- As pension contribution
- As dividend
Under the Companies Act, loans to directors are permitted to a maximum of £10,000 provided certain criteria are met. However, there are Corporation Tax implications and Competex suggests you seek their advice before taking money out in this way.
If you do not come under IR35, you might consider a mix of salary, pension contribution, dividend and other tax efficient products as part of a wider remuneration strategy that you arrange with a specialist advisor such as City Capital Analysis Ltd (see below).
If you are working through an interim provider, your client will normally pay the provider, and the provider will pay your company. You will then be able to pay yourself a salary from your company which will be paid into your personal bank account after accounting for tax and NI.
You will need to have set up your company bank account by this stage, so that your company can receive payment for your services, and so that you can refund your expenses and pay yourself a salary.
Competex will run your company payroll for you, and we appreciate that you will probably wish to pay yourself different amounts each month depending on how much you have earned and if your assignment comes under IR35 (see Payroll below). If you are working under IR35, you will be able to comply with the legislation on a month-by-month basis and so avoid a financial shock at the end of the tax year.
When you are ready to pay yourself, Competex will set-up your PAYE scheme and operate this on your behalf. Further employees can be added to the payroll at any time.
Your payroll will be run monthly according to a pre-set timetable, with computations being based on the total funds (including Employer’s NI) that you wish to devote to salaries in that particular month.
For company directors there is a technical issue relating to NI. For you, NI is charged on an annual basis, which means that no Employer’s or Employee’s NI is payable until your salary meets the annual “Primary Threshold” (pro-rated in the first year from the date of incorporation). When working on assignment for the first time you may also have the benefit of unused tax allowances, and as a result your first net salary payment will probably include less tax and NI than you would normally expect to pay in later months.
Dividends are paid to shareholders in proportion to their shareholding, as a distribution of profits after all expenses (including salaries) have been paid for the year, and after paying Corporation Tax. NI contributions are not due on dividend payments.
If you are working on an assignment that comes under IR35, it is unlikely that you will be able to pay dividends out of that income.
If you are working on an assignment that does not come under IR35, you may be able to pay dividends, but HMRC advise that you should pay yourself a reasonable salary for the work that you do through your company before paying dividends. Certainly, once you have paid salary up to the NI threshold, it is marginally more efficient to pay dividends rather than further salary. (See the section below about taxation of dividends.)
If you think you will wish to pay dividends, you should give careful consideration when you set up the company as to who the shareholders will be, what proportion of the shares they will have and how much in total you might pay as dividends during the year.
Working as an interim manager or consultant through a limited company offers you the opportunity to devise your own remuneration package, which can be considerably more tax-efficient than simply paying yourself partly as salary and partly as dividends.
Therefore, when leaving the security of permanent employment with a view to working for yourself, you are strongly advised to take the opportunity to review your personal finances. You should plan when you will need to repay any remaining mortgage and how you will do that, and you will want to consider your pension arrangements for the time when you do finally retire.
Tax-efficient products can be used as part of a plan to create tax free income and to fund expenses such as school and university fees and certain other major payments and acquisitions. You should also ensure that your will is up-to-date and you should take steps to minimise the impact of Inheritance Tax when you die. All these things should be taken into account when putting together your remuneration strategy.
Remuneration strategy is best devised with the benefit of professional advice, rather than as a result of a series of ad hoc decisions. If you already have an arrangement with an independent specialist financial advisor who advises on these issues, you should take further advice in the light of your new situation. If you do not already have an advisor and you are contemplating a medium-to-long-term career as an independent professional, we strongly recommend that you contact specialist financial advisors for interims City Capital Analysis Ltd, with whom an initial telephone conversation is always free.
Next resource: What is an umbrella company and why might I need one?