Contractor Question: What is the most tax efficient way to draw salary from my limited company?
Answer: Whilst this may differ from one contractor to the next due to personal circumstances, the following should allow you to make an informed decision on the most tax efficient way of drawing salary from your limited company.
The most common way of taking a tax efficient salary is to take a lower wage and then take your company’s after tax profit as a dividend, as this will avoid income tax.
Whilst trying to take full advantage of your personnel allowance (this rose to £9,440 per year in 2013), simply dividing this by 12 to give your monthly salary isn’t the most advantageous move, as you will still be subject to NIC’s (National Insurance Contributions).
The National Insurance allowance is currently £7,696 per year, and so to make the most efficient salary, this is the number you should divide by 12, giving you £641 per month. By paying yourself £641 per month you will not have to pay income tax or NIC’s. You would, however, still qualify for National Insurance credits, which will count towards such benefits as state pension.
At the end of the year, any after tax profit that is left within the company can be drawn as a dividend. You may pay a dividend up to the higher tax threshold (£32,010 in 2013) without paying income tax. You can, of course, take more but this would be subject to income tax.
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