28 Jun Paying yourself
Now this will probably be an alien concept to most business owners, However if you are in the very lucky position to be able to pay yourself a wage then here is the best way to do it.
So I am going to jump straight in with the good stuff here and tell you exactly what you want to know straight off the bat, However to understand the implications of what this means I would advise reading the whole blog, even though it is a total snooze fest.
Sole director of a company with no employees you are better off taking a salary of £8840, £737 per month and then topping this up with a tax free dividend payments of £2000 (if the company has made the profits to pay this out) this will give you £10840 tax and NI free for the whole year.
Sole director With employees and eligible for Employment allowance, you are best off paying yourself £12570 and then claiming the Employment allowance to offset this. This way you will be reducing your corporation tax bill plus not paying your personal tax and being able to claim back your NIC contributions. You can then also still claim your £2000 tax free dividends.
So now for the boring bit explaining the above.
We all know that HMRC likes to get their cut of your hard earned wages…. And then some…. Here are some of the ways they like to do this
- Directly from your wages (the personal allowance ((your tax free amount)) is currently at £12750 for 2021)
- From there you will pay 20% up to £50270
- Then 40% up to £150000
- After that you are making enough not to care so we won’t continue depressing those of us that are on the bread line….
- Dividend tax (profits from a business shared amongst the shareholders)
- Now here HMRC have been a little generous and actually give you your first £2000 tax free (I will wait whilst you pick yourself up off the floor after that little bombshell)….. (just bare in mind though that those dividends have come from the profits of the business which have already been taxed!)
- Then 7.5% at basic rate (between the £12750 and £50270 the workers are paying 20% on)
- 32.5 % at the higher rate (between the £50270 and £150000 the workers are paying 40% on)
- After this we are ignoring those people because they are the ones holidaying on Mars!!
- Capital gains tax, This is for anything large you sold for a big amount of money such as a house (but not your personal one). You pay on what you made so if you bought a house for £150000 and sold it for £200000 then you pay capital gains based on the £50000 you made.
- Now here HMRC have once again been very generous and they give you a tax free allowance of £12300 (please see comment above on dividends).
- From here there are a whole load of % they take based on different things so I won’t bore you with all of those details…. If you are lucky enough to have made a capital gain of over £12300 then give us a shout and we can help you out, alternatively you can find the current information here.
So these are just some of the many many ways in which HMRC like to get their claws on your cash.
Now for the NIC’s.. the other ones who like to take it before you have earned it…. To be fair though, these annoying little ‘contributions’ do pay for your healthcare and pension so maybe not quite as bad…. Just be very mindful that if you do want to receive your state pension when you retire then you must have ‘contributed’ to your national insurance for at least 35 years, if not you will be left on the streets to starve!
So there are 2 different kinds they take from you here, and this changes for if you are employed, so if you are lucky enough to be paying yourself AND employees then you will get stung 3 ways!
So for the self employed you will pay
- Class2 NI if you earn more than £6515, this is at £3.05 per week so £158.6 a year
- Class 4 contributions if you are doing really well and can earn yourself over £9569 you will currently pay 9% on all profits between £9569 and £50270 then 2% on anything over.
- Class 1 Ni’s which are again at all kinds of different rates depending on your age and circumstances and these are given a very special little number code. To see the different rates you can click here. They are generally however 12 % on all earnings over £184 a week (because they decided that doing it yearly or monthly like the self-employed would make too much sense….) so for those of you without calculators it is 12 % on money earned over £9569 a year.
- Employer Class 1 NI’s are currently at 13.8% based on earnings over £170pw, £8840 per year, this does not apply to everyone though, the list of who will pay is here.
So now we know all the ways in which HMRC likes to take your money. Let’s see all of the ways we can keep it….
So there are a number of tax reliefs out there which can work to all of our advantages.
- If you love to give to charity like we do then this is a biggie.
- contributing to your own pension pot which will mean you wont pay any corporation tax or income tax or NI contributions on up to £40k paid in to your personal pension per year.
- Maintenance payments are also a tax relief.
- Any expenses paid for work purposes such as computers and office equipment, training costs, medical insurance, travel expenses etc etc can also be deductible.
To know all of the things that you may be able to claim back then please do get in touch.
If you are employing more than one employee (including yourself) and won’t be/ haven’t paid more than £100000 to HMRC for NIC in previous years then you are also in a position to be able to claim Employment allowance, This can reduce your NIC bill by £4000 a year!
Now, As an employer of a small company who wants to actually get paid themselves, given all of the above information, you need to think about the following.
- How many employees do you have?
- Are you contributing to a personal pension?
- Is your company in a position to be paying dividends (if you are limited)?
Totally worth those 80 hour + work weeks wouldn’t you say!!