Read more: Starting A Business, Professional Payment Procedures, Ways For People To Give You Money, Late Payments & Not Getting Paid, Getting Paid Faster & On Time, Profit & Tax, Maintaining A Money Mindset, Getting Paid As A Sole Trader
Coming up: Saving For Tax & Your Future
There are lots of really good reasons to have a limited company and for a lot of people, they don’t have a proper grown up business until they have one.
On the other hand, one of the most common concerns is how you’re getting paid as a limited company:
- How does it work?
- Are there any rules?
- What about tax?
- How do you decide how to pay yourself?
- How do you transition from being a sole trader or having a job?
I’m going to answer all these questions in simple language so you can make a good decision for you.
(It’s more complicated than for sole trader, so totally get yourself a slice of cake).
What Is A Limited Company?
A limited company (also called a company) is a separate legal entity to you.
As a sole trader, you’re the same as your business, that’s one reason why getting paid and keeping records is simpler (read more).
As director of your own limited company, you are in charge of the company – but it is legally separate and you need to remember that. There are rules to follow because of the legal protection you receive.
If you’re not sure which is right for you, contact me. It’s an important decision and not nearly as scary and complicated as people make out.
For more information:
How Do You Pay Yourself As A Limited Company?
There are 2 ways you can pay yourself as director of your own limited company: salary and dividends.
You must stick with these.
You can’t take money when you want to, like you can as a sole trader.
You also need a separate business bank account and separate business Paypal account (if you use Paypal) etc. Your business money must be separate to your personal money. It’s this separation that is one factor in whether you decide to have a limited company or be sole trader as limited companies can be financially less flexible.
With a limited company you have 2 options for taking money from your company: salary and dividends. It’s totally your choice whether you take either or both.
Let’s start with salary.
Getting Paid As A Limited Company: Salary
When you draw a salary from your limited company, you become an employer and an employee. You, limited company, employ you as an employee.
Your salary is a tax-deductible expense for your company, unlike sole trader drawings.
You pay yourself through PAYE payroll monthly or annually. It’s easiest to ask your accountant to do this or use a payroll bureau.
The usual practice is to pay yourself what’s known as a minimum salary (more information later on that).
Getting Paid As A Limited Company: Dividends
You can also pay yourself dividends.
These are just like dividends from a company traded on the Stock Exchange, only it’s from your little company and not a big one.
There is one strict rule about dividends: dividends must come from post-tax profits.
Post-tax profits means the money that is left over after your company has paid its tax bill. It’s not legal to pay a dividend if your company has a loss.
There are a few other legal tick boxes for dividends which your accountant should do for you.
Dividends are not meant to be salary. They have a preferential tax treatment so you need to plan your personal finances to manage irregular income. Yes, you can have uneven income as a sole trader too, but the difference is with a limited company you can’t dip into the pot of business money whenever you want to.
What About Tax?
Tax is where getting paid as a limited company can feel confusing and you’re tempted to throw your hands in the air and say ‘whoah! Too much! I choose not knowing’ 😉
The trouble is, if you do that, it’s your own money you’re choosing not to know about. Not so great, you’ll agree.
You need to consider corporation tax, income tax, several classes of National Insurance and dividends tax:
- Your company pays corporation tax on its profits
- You pay income tax as an employee on your salary
- Your company pays National Insurance on your salary (read more)
- You as an employee pay National Insurance on your salary (read more here and here)
- You as a shareholder pay dividends tax (read more)
This is not as bad as it sounds, honest!
There are lots of ways of reducing your tax bill depending on your individual circumstances. In fact one of the reasons for having a limited company is to save money on tax once you earn £35k+.
There are several standard ways of keeping your tax bill lower. I won’t go into them here as a lot depends on your personal tax situation and what other money you have coming in, how old you are, what your financial priorities are, whether you want a mortgage in the next few years, whether you have a new company or an established one.
The standard method though is to pay what’s called a minimum salary which gives you National Insurance credit for state pension, maternity and sick pay etc, your company and you doesn’t pay National Insurance and you don’t pay (much) income tax. You top this up with dividends.
(Bear in mind this system only works if you aren’t using your income tax allowance elsewhere, e.g. a job, and you need professional help to support you making the right decision in your circumstances).
What’s important is that you understand how you’re getting paid as a limited company and why.
How Do I Decide How To Pay Myself As Limited Company?
Your accountant should have explained to you how you’re paid and why they made that decision. Even if they did explain, do you feel confident and understand, so you can make good decisions about your future?
It’s a lot harder to grow your business if you don’t feel confident how you’re being paid!
One of the most inspirational ways I work with my limited company clients is a VIP Day/Half Day at a vintage tea room or 5 star spa where you’ll learn much more about how it works being paid when you have a limited company, which legal tick boxes you need to know about, how you can decide which payment structure is right for you and how to transition financially from employment or sole trader to limited company.
It’s a luxurious way to treat yourself to some financial self care and transform how you feel about your limited company, so you can grow your business and feel empowered and confident, read to take on the world. If you’d like to know more, book a chat at no charge.
Transitioning From Sole Trader Or Employment
It can be a big change moving from a sole trader or employment to having most of your income from a limited company.
The biggest change is that you don’t get a big chunk of money at the end of the month (employment) and you can’t take money whenever you want to (sole trader).
Most times, you’ll have a small salary every month topped up with irregular dividend payments. It’s a good combination of regular income and tax efficiency.
What’s important is that you plan the transition so it’s smooth and easy and you can comfortably pay your bills the whole time.
- Track your income and expenses for business and personal so you know what income you need and what you spend
- Know how much personal income you need to have a basic lifestyle so you can cut back if you need to while you get settled
- Can you earn money from any other sources than your business as a temporary measure so your income is more diversified? (This is one reason why starting a company while you’re in employment can be a good option)
- Do you have a business bank account and completely separate accounts for all transactions (e.g. Paypal) if you’re a sole trader?
- Ease the transition from a sole trader and pay yourself a regular ‘salary’ with top up irregular payments
Starting a limited company or upgrading from sole trader is a wonderful opportunity to feel confident and empowered about your money. Consider getting help if you’re feeling stuck or don’t understand and get in touch (you can book a chat here, no charge).
Now, where’s the cake? Oh yes, that’s better.
Getting Started Getting Paid As A Limited Company
Make sure you understand how you’re paid as a limited company and why you’re paid as you are. It’s a good foundation for your business and supports your growth and your dreams.
The most important action you can take is to get started.
If you want support with understanding getting paid as a limited company, what’s right for you and a safe space to ask as many questions as you want, get in touch or have a look at my Demystify Limited Companies Workshop.
If you want easy to understand courses and guides with printable checklists and a sense of humour and mentions of cake, have a look in my shop.
Excited to get started getting paid as a limited company?
This article is part of a series about getting paid as a business.
- Starting A Business
- Professional Payment Procedures
- Ways For People To Give You Money
- Late Payments & Not Getting Paid
- Getting Paid Faster & On Time
- Profit & Tax
- Maintaining A Money Mindset
- Getting Paid As A Sole Trader
- Saving For Tax & Your Future
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