One of the most common questions asked by limited company contractors is what level of salary they should pay themselves.
There are a number of things to consider to strike the most tax efficient mix of salary and dividends. Here, Richard Murray, head of operations at ClearSky Contractor Accounting, provides some pointers:
How to decide what level of salary to take
“As a company director, withdrawing a low salary topped up with dividends is the most tax-efficient way of taking money from your business – provided of course that you are operating outside IR35.
“For 2019-20, the tax-free personal allowance for most people stands at £12,500, but it is possible to draw a salary of as little as £8,632 and still qualify for the state pension. The most tax efficient salary to draw will therefore depend on your circumstances (such as whether you have any other income) but will typically be between these two figures.
“You should also think very carefully about how much money you want to withdraw, especially if you need to demonstrate an income when applying for a loan or mortgage.
“Some lenders will include dividend income when establishing how much you can borrow, but this is not always the case. Therefore, it is always worth doing your research so you are able to make a well-informed decision.”
Also worth a read is Limited company contractors – salary vs. dividends.
To work out your potential tax liability for different levels of salary and dividends, try our new contractor tax calculator.