If you are a business owner wondering about how to pay yourself then have a read of this article as Ascentant aims to outline salary and owner draws.
There’re things you need to know when formulating your optimal monthly or annual salary and how you can take dividends from your business, all this combined with the information from the Spring Statement put into the mix.
What you need to know first is the following:
- Your tax free personal allowance is unchanged at £12,570
- Your basic rate threshold remains the same £50,270
- The tax free dividend allowance is still £2,000
What is the best way to pay yourself from your business?
The change that is essential to be aware of is the rate you’ll pay on dividends in the next tax year; it’s an increase of 1.25%. So let’s talk about dividends first.
Once you understand your P/L and have a good cash flow forecast in place you might be able to extract dividends regularly; say every quarter. Or maybe you are happy to have a one off dividend payment after you’ve submitted your corporation tax return.
Are dividends taxable?
You have a dividend allowance every tax year but if you’re dividend pay out is above allowance (which is £2,000 per year) you’ll pay tax on the income.
If you want to read more on dividend tax there’s a great WHICH article on this topic.
Working out how much tax you’ll pay on your dividends is dependant on your tax band. The Government’s website shows this example:
Business owner salary
There are many reasons why paying yourself a wage from your business is a good thing to do including:
- Tax deduction for company on directors’ salary
- Paying yourself a salary to keep up national insurance contributions for your ‘stamps’
- Depending on what you pay yourself will affect the tax paid on dividends
You’ll also need to consider national insurance. For the tax year 2022/23 you need to understand the following:
- The Lower Earnings Limit (LEL) is £533 per month / £6,396 per year
- The Primary Threshold which is the EMPLOYEE NIC which is £1,047.50 per month / £11,908 per annum from July 6th 2022 (remains the same until that date)
- The Secondary Threshold which is the EMPLOYER national insurance contribution which has not increased (£758 per month / £9,100 per year)
What’s the best combination of salary and dividend?
That’s going to depend on a few things like:
- If you qualify for the £5,000 employment allowance (as an employer)
- Whether you have a figure for your personal use in mind (what net cash you are looking to achieve)
- If you are a limited company for corporation tax savings
If you make use of the personal allowance and pay a salary of £12,750 and then draw dividends of up to £37,700 you’ll be earning £47,058 (after tax / NIC) for yourself.
It’s really important to understand what dividends you can move out of the business without adversely effecting your cash flow. You can also look at leaving profit in the business or utilising pensions for some of the profit from your financial year.
Still confused as to what’s best for you and your business? Give us a call we’ll walk you through everything to ensure you’ve got your ducks lined up. Derby Accountant, Ascentant Accountancy are happy to speak, call us on 01332 981920 or email firstname.lastname@example.org.