How do I pay salaries through my company?
This is the easy part, it’s simply a payment from the business bank account to the personal account of your employees. You need to make sure the payment that made is net of any taxes due (income tax and national insurance).
What level of salary should be taken?
This is a key decision and will always depend on a number of factors. As the IR35 status for employees will need to be determined, national living wage thresholds, what type of work is being performed by employees and if there are any formal contracts of employment.
As a sole director Limited company, the choice in terms of being tax efficient and assuming no other personal income, outside of IR35 and no other factors, would be the National Insurance (NI) threshold. This is currently £8,060 per annum/£671 per month. At this level, no income tax or NI would be due.
This is due to the new rules HMRC imposed in regards to the Employment Allowance, therefore any sole director Limited companies, if any salaries are higher than the NI threshold, the company will be required to pay the Employers NI due.
However if a company has two employees, who are both earning salaries above the NI threshold, the company will be entitled to claim the Employment Allowance, which covers the cost of Employers Class 1 National Insurance. Any excess will still be due by the company.
In this scenario, the choice in terms of being tax efficient and assuming no other personal income, outside of IR35 and no other factors and with your spouse as an employee too. Then it’s best to have one on a salary of £11,000, with the other on a salary of £8,160. This does mean that some NI will be paid on both salaries however the corporation tax relief will outweigh this.
How does my IR35 status impact the salary I can take?
If you are ‘outside’ IR35 (don’t have employee/employer relationship with your end client) and therefore an independent contractor. You can have a lot more flexibility on the level of salary that you take, plus you can complement the rest of your income with dividends from your Limited company.
But, if you are ‘inside’ IR35 (have effectively an employee/employer relationship) then effectively you should be taxed as an employee but through a limited company.
Also, with the new rules coming for working in the public sector, this will also impact the net income that your company will receive, as the agency/client will determine the IR35 status and deduct any PAYE taxes before the payment comes into your company.
What other things do I need to consider before I pay myself a salary?
Firstly, do you have a PAYE scheme set up? As you will need to register for a PAYE scheme first with HMRC. Then once you have decided on the level of salary, you will need to make sure that you are making the correct submissions to HMRC, to report the Real Time Information.
You will need to look at other sources of income that you are likely to receive in the tax year outside of your Limited company. For example, have you already been employed before contracting? As if so, this will impact both your salary and dividends, so this will need to be reviewed at what is the most tax efficient route.
Plus, if you have another employment, pension income, multiple contracts through your company with different IR35 statuses. Or maybe you are looking to make pension contributions or get a mortgage in the near future. All of these need to be discussed in detail, to make sure what you set up is right for you.
How Aardvark Accounting can help you?
We can help you to get your head around your circumstances and simplify the jargon for you. Plus, we’re the best value for personal service and have tailored accountancy packages to suit you.
You’ll always have someone on hand to put your mind at ease from your financial business worries. Contact Aardvark Accounting today, we’ll do the “aard” work for you!
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