Under the law, a Limited Company is an artificial body operating as a separate legal entity. This directly means that the company is acting on its own, and it has a distinct identity that belongs to it. So, if today you register a private limited company, say XYZ Limited, this company is now declared as an artificial body that will function on a name of its own.

All the revenue and all the losses directly impact the company’s account. It is the company that pays all the shareholders, directors, employees and staff. The tax is also deducted from the company’s account.

Salary:

You are required to transfer your salary from the company’s bank account to your bank account as per the agreement. This requires you to register with the HMRC, download the online app, and process the transfer from the company’s bank account to your bank account, submitting the transaction details to HMRC.

Let’s see the tax implications of paying yourself a salary:

Your salary is an expense for the business; therefore, it will deduct from the profits. Based on your salary, you might have to pay income tax and national insurance. On your behalf, your company might also pay the employer’s national insurance, depending on your salary.

You can avoid payment of income tax and national insurance if you pay yourself below the threshold. The threshold was 8,424 Euros a year in 2018/19.

This amount implies the following:

1. This amount will keep up with your tax-free personal allowance. (In 2018/19, it was 11,850 Euros).
2. This amount is also below the National Insurance threshold, so you do not have to pay the National Insurance.
3. This is the threshold for employers national insurance which does not require the company to pay the national insurance either.
4. You would be open to the benefits of national insurance without having to pay it.

This is too little an income for a company director where the company is making enough profits. But, here’s where the dividend has a chief role to play.

Dividend:

The dividend is the profit distribution among a company’s owners (shareholders) once all the expenses, including taxes, have been deducted.Implications of paying yourself a dividend:

The dividend distributes after deduction of all taxes; therefore, the company does not stand liable to any more taxes, but it definitely affects your personal tax and insurance liability as it will increase your income.

As of current updates, there isn’t any change in the dividend rates.

The income tax rate is higher than the dividend tax rate, so you might feel like not taking a salary at all. But, it might not be sustainable on a long term basis. Avoiding taking the salary might drive HMRC’s attention that doesn’t sound very interesting.

However, a professional team can help frame better strategies and financial decisions that will result in smart moves.

FinConcile is a team of accredited and seasoned specialists who specialise in accounting, tax, payroll, and compliance. Our team consists of CAs, lawyers, Company Secretaries, and other finance specialists who help accounting firms achieve long-term growth cost-effectively and accurately. We are your UK based outsourcer enabling financial stability for your business premises.