Salary
Unless you have other income, we will normally recommend you draw a salary from your company. This will usually be at a lower limit to ensure you maintain an NI record with HMRC (and therefore a state pension contribution) whilst not actually having to pay any tax or NI. For the 2024/25 tax year this is £758 per month (2023/24 £758 per month).
If you are able to claim the employer's National Insurance allowance, we may suggest you pay yourselves a salary at the personal allowance - for the 2024/25 tax year this is £1047.50 per month (2023/24 £1047.50 per month). However you will need to remember to pay any employee NI due which will normally be in December to March. The earlier months do not attract employee NI - only the later months.
If we're running your payroll for you, we'll let you know how much you should pay yourself each month. This should be posted to 'Directors Salary' in your bookkeeping system.
In exceptional circumstances, and if you are unable to physically pay yourself a salary, then we will post a journal into Xero which will record the salary as an expense and show it as owing to you on your director's loan account.
This salary will be a tax deductible expense in the company's accounts.
You will also need to include this salary on your personal tax return.
If you don't have a PAYE scheme set up with HMRC then we can do this for you - however please be aware that both setting your payroll up for you and submitting the monthly returns to HMRC are chargeable services.
If you would like to find out more about this, just let us know.
Dividends
Some clients prefer to take money out of the limited company as and when they need it. At the year end we then declare a final dividend based on the profits for the year and this is used to offset the amounts they've taken during the year.
Obviously with this approach it often means that the director owes the business money until this 'loan' is cleared at the year end with the final dividend. Where the loan amount exceeds £10,000, unless interest is charged on the loan, this is considered to be a benefit in kind on the director and requires a P11d to be submitted and the benefit to be included in the directors personal tax return. In order to avoid this situation (and the associated costs), we will automatically charge interest on the loan. This has the dual effect of increasing the loan owed to the company and the interest charged will show as income in the company's accounts. However it also means there is no longer any benefit in kind (as it's not an interest free loan) and so there is no requirement to prepare or file P11ds.
And a word of caution. When you're taking money out of your business, don't think just because you've got cash in the bank that's it's fine to take this as drawings. Because remember, if your company makes a profit then you'll probably have some corporation tax to pay - and although it's not due until 9 months and 1 day after the company's year end, it's amazing how quickly the deadline will be on you!
And whilst taking money out of the company during the year and offsetting this at year end with a dividend is the simple approach, there are some nasty tax traps to avoid which we've mentioned here.
So, if you're organised with your paperwork (or you're a contractor using FreeAgent), you may want to take a dividend when your profits (after accounting for corporation tax!) allow.
In FreeAgent you can see a corporation tax forecast and how much you can declare as a dividend on your dashboard - you can see more about how that works here. Once you declare a dividend, FreeAgent prepares the paperwork for you - just go to My Money > Dividends to see the dividends declared per shareholder and then click on any dividend to download the paperwork.
In Xero it's slightly more complicated as Xero doesn't show you a corporation tax forecast or how much you can declare as dividends. So there are two ways you can estimate your corporation tax and you can see more about both of these here.
And ideally we recommend setting up a business savings account and transferring an amount each month to cover your corporation tax based on your profits (at least 20% but, if you want to be on the safe side, then 25%). If you can't do this, then please be aware that you will need to pay your corporation tax by the due date or else you will have to pay interest on any tax not paid. Also, you may find that HMRC put the debt in the hands of a debt collection agency and you may be faced with threatened legal action!
We recommend if you pay yourself a dividend every month that you pay the dividend on a different day each month and a different amount (If it's the same amount each month paid on the same day, then HMRC could challenge this payment and try to categorise it as a salary. They wouldn't succeed but our view is why give them the chance!).
And remember, dividends form part of your own personal taxable income and will be included on your personal tax return. Depending on the level of your income, there may be additional tax for you to pay. You can use our workbook here to help estimate your personal tax for 2023/24 and our workbook here to help estimate your personal tax liability for 2024/25.
For a general overview as to what we are trying to achieve when we prepare your accounts (with regards to dividends and your personal tax), you can read our overview guide here.
Illegal dividends
If you take dividends exceeding the profits available in the company (being the retained profit/loss plus the post tax profit/loss for the current year), these will need to be reversed. These dividends will then need to be reclassified as drawings and may lead to your director's loan being overdrawn and this could lead you into the nasty tax trap!