How to pay myself from a LTD having a full-time job?

[javier11]

Hi All,

Thanks for reading this and helping me out to figure out this newbie matter. I've started a limited company to be able to invoice my freelance side work as I work full-time for a company while I do my LTD part-time.

I'm earning £35k/year at my current full-time job and I'm trying to turnover around 1.5k a month from my limited company. I was wondering what is the best way for me to pay myself from my limited company business account into my personal account, is the best way through a salary if so what are the next steps, is it through dividens is so how can I calculate that?

Thanks, Javi.

 

[QuickRebates]

Hi Javi,

As the income from your limited company will probably push you into the higher rate, you need to extremely careful with your planning. Given that the higher rate of tax is 40%, it is highly recommended that you seek an Tax advisor that will manage this for yourself.

Nevertheless, a combination of salary / dividends would be the best way forward.

 

[javier11]

Hi @QuickRebates. This month my income is of 700 pounds from my limited company. I was thinking on paying myself today as the client has delayed with the payment and I needed it right away, what do you think that it would be the best way to do this month?

 

[QuickRebates]

Hi,

You can't just look at one month, you need to project your income for the next couple of years and devise a Tax efficient plan constituting a salary / dividend package. There will ways and means of using the directors loan account to reduce Tax also.

I think you're looking for an easy DIY solution, unfortunately this is really not the case.

 

[javier11]

Hi @QuickRebates thanks for this. The thing is that not every month the income will be the same and as I work fulltime there will be months that there will be really low income or no-income at all. Why it the reason that I can't do dividends every month?

 

[QuickRebates]

Dividend tax isn't straight forward like it used to be, there are further Taxes to pay after £5,000. £2,000 from April 2018. Therefore it might be better to register as an employer and pay yourself some salary.

As advised above, it would be highly recommended to pay an accountant just a small amount for them to manage your Tax, and you save lots more and have peace of mind!

 

[Scalloway]

You can only pay yourself dividends if the company has profit after tax to pay out.

 

[javier11]

Thank you all this is being really useful. So let's see if I'm clear, the ideal case scenarios is that I will need to pay mysely as employer of the payment using payroll as dividends can only be payed after the end of the year. Also @QuickRebates can you recommend me an accountant?

I know that this sounds quite novice but I want to start with the right and make sure that I pay myself on the right way.

 

[QuickRebates]

Dividends can be paid through the year (interim dividends), but as @Scalloway pointed out above, they can only be paid from profits. I.e. you can't pay a dividend using an overdraft, or credit card if the business does not have any assets. This is illegal.

You can also withdraw from the directors loan account, and clear the balance within 9 months of the year end for effective Tax use.

 

[javier11]

I've setup Freeagent and added all my invoices and came up with this for this month, does it mean that I can do dividens each month base on those calculations or do I have to do payroll? And If I have to do payroll, what would it happen if there's no profit in one month and I decide to not to pay myself? i.imgur. com/lev4Kbi.png

 

[Scalloway]

You should look at the profit and loss account for the year to date to see if there is a profit, you can't look at a month in isolation.

If you set up a PAYE scheme you need to run the payroll at a set time each month. You can run a payroll but leave paying the cash out until it is available. You still need to pay the PAYE tax deduction or you will get penalties,

 

[Anna Chandley]

You need to account for the corporation tax on profits before you can pay a dividend. Dividends can only be paid from taxed profits.

Say your pre tax profits in month 1 are £700, the corporation tax payable would be £133 leaving £567 of post tax profits available to pay a dividend.

In month 2 say the cumulative profit is £2000, the cumulative tax payable is £380 leaving £1,620. Deduct dividends paid in Month 1 of £567 leaving £1053 available to pay as a dividend in month 2.

 

[Newchodge]

If you run pay yourself a salary of £700 one month you will pay tax on all of that money @ 20%. Your company will be able to claim the expense of that £700 against Corporation Tax, so your company's Corporation Tax will reduce by the same amount as you pay tax. So small effect. But you will also pay 12% NI on £20 so and your company will pay 13.8% NI on £20. Although the company NI payment will be offset against Corporation Tax.

If you get a salary of £700 every month, then you will earn 8,400 per year, raising your salary to £43,400 per year. That keeps you below the higher rate tax level of £45,000. But if you pay more your tax rate may rise.

BUT Corporation tax may reduce if the Tories have their way or increase if Labour gains power.

If you are happy to juggle all these variables, then please do so, or have a short meeting with an accountant.

 

[S2K]

What's your IR35 status?

 

[DontAsk]

Dividend tax isn't straight forward like it used to be, there are further Taxes to pay after £5,000. £2,000 from April 2018.

Reduction to £2k never made it into the finance bill due to the election. It's still £5k fpr 2018 at the moment.

 

[MyAccountantOnline]

Thank you all this is being really useful. So let's see if I'm clear, the ideal case scenarios is that I will need to pay mysely as employer of the payment using payroll as dividends can only be payed after the end of the year. Also @QuickRebates can you recommend me an accountant?

I know that this sounds quite novice but I want to start with the right and make sure that I pay myself on the right way.

Based on the limited information in this thread I wouldn't recommend a salary.

You can pay dividends whenever you want assuming the company has sufficient after tax profits to pay the required amounts.

Any good accountant can help you with this, lots of us here, me included, deal with scenarios such as this every day.

 

[STDFR33]

Do you need to extract the money? One of the key benefits of a company is the ability to shelter the profits.

Another consideration might be pension contributions.

There's lots of planning opportunities, but it will require you to sit down with a professional with all the facts on the table.

 

[Chart Accountancy]

It will be tax efficient to utilise your full basic rate tax allowance. If you earn £35K/year from your current employment, you can receive up to £10K salary from your company. You will pay 20% income tax on the salary but save 19% corporation tax. If you were to pay only dividend, you will first have to generate the profit and pay the corporation tax so that you will end up paying more tax via the corporation tax. The additional payments above your salary can then be dividends so that you utilise your £5,000 dividend allowance. You could also consider as it has been said above pension contributions to reduce your company's profit or retain the funds in your business bank account if not needed. Depending on your future circumstances, you could then extract the funds at a later date under a lower tax rate if possible.

With regard to assessing your available retained profits for paying dividends, FreeAgent calculates your available reserves under the Overview screen where you can see your profit after corporation tax and any dividends already taken.

 

[Newchodge]

It will be tax efficient to utilise your full basic rate tax allowance. If you earn £35K/year from your current employment, you can receive up to £10K salary from your company. You will pay 20% income tax on the salary but save 19% corporation tax. If you were to pay only dividend, you will first have to generate the profit and pay the corporation tax so that you will end up paying more tax via the corporation tax. The additional payments above your salary can then be dividends so that you utilise your £5,000 dividend allowance. You could also consider as it has been said above pension contributions to reduce your company's profit or retain the funds in your business bank account if not needed. Depending on your future circumstances, you could then extract the funds at a later date under a lower tax rate if possible.

With regard to assessing your available retained profits for paying dividends, FreeAgent calculates your available reserves under the Overview screen where you can see your profit after corporation tax and any dividends already taken.

What about the 12% employee NI? The deductions on £10,000 would be 2,000 +220.32.

 

[Chart Accountancy]

If the salary is above £8,160 there will be NI due on the difference to £10,000 which will be 12% employee and 13.8% for the employer.

 

[DontAsk]

You will pay 20% income tax on the salary but save 19% corporation tax.

Which is a net cost. Better to pay 19% CT than 20% PAYE, saving 1% + NI costs, and use the tax free dividend allowance.

 

[Chart Accountancy]

The OP other earnings are £35K and the tax free dividend will push him quicker to higher rate where HR dividends are taxed at 32.5% so that in his circumstances it will be tax efficient to receive some salary within basic rate at 20%, and then receive the tax free dividend.