What Salary Should You Be Giving Yourself From Your Own Business

When starting out with your own small business, there are many different structures to choose from with the most popular company structure in the UK being a limited company.

A limited company can be a very sensible choice for self-employed people, particularly, as your turnover grows, the structure of the limited company can throw up a couple of things that can be a struggle for small business owners to get their head around.

One of the biggest hurdles you stumble across when starting your own business is knowing what you should be paying yourself and also how to do so.

Taking a Salary

For owners of a limited company, there are a few main reasons why they should take a salary from their own business, besides the obvious fact that you need some form of income to live on.

The first is to do with tax. Your salary can be classed as an expense to the business in a limited company, which in turn will lower the company’s Corporation Tax Bill at the end of the year.

The second reason is that by taking a salary can benefit your pension in the future. The Lower Earnings Limit of £6,032 per year sets a benchmark in the current tax year. If you are paid anything above this then it qualifies you for another year of the state pension.

What Should My Salary Be?

There are benefits of having a lower and a higher salary, so it comes down to what works best for you and your company.

Firstly, in the current tax year, taxpayers have a personal allowance of £11,850. If you allow yourself this salary over the course of the tax year then you won’t pay income tax.

Additionally, there is also a National Insurance Contribution (NIC) threshold, but this is set at a slightly lower level before you will start receiving charges for it.

If your salary is above the NIC ‘Lower Earning Limit’ of £6,032, but it falls below the ‘Primary Threshold’ of £8,424, then there will be two outcomes. You won’t pay NIC and your State Pension contribution record will continue.

However, there are negative repercussions of taking a lower salary. For example, you could miss out on your annual tax-free allowance if your salary is paid at the NIC Threshold.

Tax On Salary

When it comes to PAYE, your salary is treated in the same ways as any full-time employee regardless of whether you are the business owner.

Moreover, income tax is cumulative for all employment earnings during the tax year. This means that if you have already earned £7,800 for example, from any employment in a tax year, then your personal tax-free allowance will be reduced by this amount.

However, National Insurance Contributions (NICs) aren’t cumulative like income tax. Each new employment has a separate earnings threshold which will be taken into account before NICs are due. Please note that there is a maximum amount of NIC that can be paid for employees who fall into the higher tax bracket.

This threshold is set as a monthly amount if you’re an employee that is below Director-level. You’ll be liable to pay NICs if your pay exceeds this amount in any month,

Directors have an annual threshold, which is 52 times the weekly threshold amount. Again, when their salary goes above this they will pay NICs.

So it comes down to knowing what the most tax efficient way to take a salary from your own business is…

Looking at all the above taxes together, it is usually the most tax-efficient for people to take a salary up to the Primary National Insurance threshold, which is £8,424 in the 2018-19 financial year. You will still accrue qualifying years for the state pension as the Lower Earnings Limit is lower than the Primary National Insurance Threshold.

You won’t pay any income tax if you take a salary up to the Primary National Insurance threshold as long as it is your only source of income. However, you can pay yourself as much or as little as you like.

If you are unsure what would work best for you and your business, then request a free call back from one of our qualified Milton Keynes accounts or call us on 01908 046964.