If you are considering becoming a limited company contractor you’ll need to think about how you will pay yourself. The right way will depend on your individual circumstances. Our specialist contractor accountants will provide the advice and support you need to work out what will suit you best.
Contracting through your own limited company is usually the most tax efficient way to work, leaving you with the highest level of take-home pay when compared to other working options.
This is because most limited company contractors pay themselves via a mixture of salary and dividends. Usually, you will take your Personal Allowance (tax-free amount) as salary and receive the rest of your income as dividends. This is a tax-efficient way to work as dividends are not subject to National Insurance and they’re sourced from your company’s profits which are taxed at a lower rate.
Another benefit is that you can pick when you take some of these payments (within limits), which allows you to play to maximise the use of your annual allowances. Remember, as a limited company contractor, you can claim tax relief on a range of allowable business expenses which reduces your company’s profits and therefore the amount of Corporation Tax you have to pay.
Most limited company contractors will take dividends, but there are rules about how you do this.
You can only take a dividend from the profit which remains after you have paid Corporation Tax. Plus, your dividends are subject to Dividend Tax, though there is a tax-free threshold. How often you take dividends is up to you. Some people take them monthly, others quarterly.
If this way of paying yourself is going to leave you with insufficient funds for your living expenses, you may need to consider taking a higher salary and lower dividend. While this would be less tax efficient, it does allow you to take money out of the business before it is received. This means you can pay yourself based on future expected earnings (like payments you expect to receive from clients), unlike a dividend which can only be paid once the income has been received and the Corporation Tax deducted.
We appreciate it can be difficult to think through all the options available to you. If you would like to discuss any aspect of accounting for limited company contracting, please get in touch with our expert team. You may also find it useful to download a copy of our Guide to Limited Company Contracting.