ways to pay yourself through a limited company

Tax Efficient Ways to Pay Yourself through a Limited Company

There have been multiple convincing reasons to choose your business operations through a limited company. This could convince the business owners and the consultants to carry out their business plan via a limited company. Several people opt for this option due to the protection factor involved in doing business through an LP. In some other cases, people find the tax benefits appealing and choose to operate business activities through LP than doing it as a sole trader. However, to be more precise you tend to incline toward this business plan to figure out ways to pay yourself through a limited company.

Everyone likes to plan the business in a way that can help to reduce the tax bills and bring the most profit from the business. Considering this focus, we have outlined some of the ways to pay yourself through a limited company even if you are the owner of that limited company. Sounds interesting? Some people believe in getting paid in form of salary or through dividends, while others are more inclined to for pension contributions. However, in this discussion, you will get to know about the popular and tax-efficient ways to pay yourself from your own limited company as well as what is tax-efficient business planning.


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Ways to Pay Yourself through a Limited Company

As discussed, in the right circumstances a limited company have a high chance of becoming tax efficient in its dealings. However, all the tax-efficient ways to extract money can not be suitable for all types of businesses. Most people think that it is beneficial for a company when lower tax rates are charged on dividends and salaries. Even the owners are sometimes unaware of the fact that it is possible to control the fund extraction activity from your company as well as the timing of tax charged on this.

Several business owners are not aware of the fact that they can extract funds by using the name of their family members even if they have no involvement with your business. If an individual understands the importance of the right circumstances in the business and deals with the combination of distribution of wealth among family members, pension contribution, dividends and salary, there are high chances of achieving a highly tax-efficient business. Some of the popular ways are discussed below.


1- Pay Yourself in Form of a Salary

If you are a business owner who is looking for tax-efficient ways to get yourself paid through your limited company. The most popular and efficient way is the salary in form of remuneration. The limited companies that pay salaries are connected with the PAYE scheme to operate the system smoothly. The common practice to bring this into HMRC‘s knowledge is by the use of a real-time system which is also known as RTI.

If you carry out a business plan through a limited company and own the position of an owner, it is still worthwhile to draw some amount of money in form of a salary. However, with this practice, you will pay national insurance contributions as well. As salaries are considered to be deductible business expenses for a company, this will allow you to reduce the corporation tax that your company owes otherwise.


2- Pay Yourself through Dividends

Another common tax-efficient method is to pay yourself in form of dividends. If you have paid the corporation tax successfully and are still able to make profits. This profit amount will be distributed among the shareholders of the company. This payment is made in form of dividends. However, the shareholders have to be aware of the factor involved with the dividends, that is they are now liable to pay tax on the received payment in form of dividends.

There are chances to qualify for the tax-free dividend allowance, however, this depends on the amount of money that comes through dividend income. Moreover, the tax-free dividend allowance is £2,000 for the tax year 2022-23. This also means that you are not liable to pay tax for an initial £2,000 earned through dividend income.


3- Make it to Your Pension Contribution

As we all know that limited companies tend to pay pension contributions to the employees on behalf of directors. The rules related to pensions are known to be difficult to handle. However, on the amount of pension contribution, there is the implementation of corporation tax. So this again comes under tax deductible case. In case the contribution is coming under the pension allowance, such an individual is liable to pay corporation tax.

Moreover, in most cases, the individual can take out the amount of pension up to a certain percentage and this will be considered tax-free. Using the amount of allowance from the previous year is another tax-efficient way of taking out money from your limited company that will go tax-free.


The Bottom Line

Now that you have gathered a fair amount of information about ways to pay yourself through a limited company, we can bring the discussion towards wrapping up. Although there are several tax-efficient ways to extract money from your limited company a tax-efficient way, however, you have to make the circumstances right for this scenario to achieve the goal.

Whether you decide to pay yourself in form of dividends, salary, or pension contributions, you must ensure to gather the right information to make your business highly tax efficient in this regard. You can even reach out to an expert. We hope these few minutes of reading will help to deal with tax affairs more efficiently in the future.


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