Setting up a limited company is a little more complex than registering as a sole-trader in many aspects – including paying yourself.
When you’re the operator or shareholder of a limited company, you’re considered a separate legal entity, which means you can’t take money from your business unless you adhere to specific regulations. This isn’t the same as being a sole trader, where yourself and your company are seen as the same entity, and you can pay yourself whenever (and however) you want.
This guide will look at your options for paying yourself from a limited company. Don’t worry – it’s easy once you’re clear on what to do. But if you still need some advice, maybe you should look at hiring one of our local Accountants to deal with this for you?
How Do I Pay Myself From A Limited Company?
There are three options for paying yourself from a limited company: taking a salary, taking money as dividends payments, or taking money as a director’s loan. These are discussed in more detail below.
Taking a Director’s Salary
As a limited company director, your first option is to register for HMRC’S PAYE (pay as you earn) system and pay yourself a regular salary. Your company must be registered with HMRC to have access to this option. Registering is easy to do and can be completed online. As an “employee” of your business, you will need to pay National Insurance and tax contributions if your salary crosses the personal allowance threshold.
It’s worth carefully considering how much salary should be paid to yourself and any other company directors or shareholders. You can find more information about tax and salary later in this article.
The benefits of receiving a salary from your limited company are:
- The money can be paid even if your business isn’t making a profit.
- You can make bigger contributions to your personal pension.
- It’s relatively easy to pay yourself a salary.
The drawbacks of a salary are as follows:
- Your income tax will be higher than if you’d paid yourself in dividends.
- Both you and your limited company will need to pay National Insurance.
Taking Dividends Payments
Alternatively, if you’re also a company shareholder, you can leave some of your salaried income in your business and take shares of the profits instead. These shares are known as dividend payments. The percentage of your ownership of the company will determine the money you receive from these dividends. The more significant percentage of your ownership, the greater portion of available profits you will receive.
If you’re your limited company’s sole shareholder, you’ll receive all the remaining income in dividends after any relevant costs and tax have been deducted.
Below are some of the benefits of getting paid in dividends:
- Your income tax will be lower on this form of payment.
- Neither employer’s nor employee’s NIC applies to dividends.
The drawbacks of receiving dividend handouts are:
- Shareholders can only receive dividends when the company is making a profit.
- Dividend handouts can be unpredictable.
Paying From a Director’s Loan
You can also take money from your limited company using a director’s loan account. You can use this method to lend your company money. You’re also entitled to take money from the company that exceeds the amount of money that you’ve paid into the business. Additionally, a director’s loan lets you take money back that you had already put into the business.
You must keep a clear record when you take money from your company in the form of a director’s loan. For this, you’ll need a director’s loan account in your business’s balance sheet.
Your director’s loan account will be overdrawn if you take more money from your company than you’ve paid into it. Be wary of doing this, as there may be tax implications. On the other hand, if you are owed money from your company, your director’s loan account will be in credit. You will be able to take money from your business at any point, and you won’t be hit with additional tax liabilities at the end of the tax year.
The advantages of directors’ loans are as follows:
- Can give you access to more money than you’re currently receiving.
- Ideal for covering short-term bills or one-off costs.
The drawbacks of directors’ loans are:
- Requires more financial admin.
- Can be tedious to keep on top of.