What salary should I pay myself as a limited company contractor?

One of the most common questions limited company contractors ask is what salary they should pay themselves as directors.

It makes sense to pay yourself a salary, as the amount can be offset against the company’s Corporation Tax liability.

There are several factors to consider when you work out the optimum salary level to pay company employees.

How to work out the optimum salary to take

We asked Richard Murray, head of operations at ClearSky Contractor Accounting, to provide an overview.

The Contract Eye team has updated the numbers for the 2024/25 tax year.

“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 2024-25, the tax-free personal allowance for most people stands at £12,570, but it is possible to draw a salary of as little as £6,396 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.”

What factors affect the optimum salary?

  • Can your company claim the Employment Allowance? This incentive cancels out up to £5,000 of Employers’ NIC costs. Unfortunately, most small companies are excluded from this incentive.
  • Have you already earned income from a previous role during the current tax year?
  • Remember that the personal tax year runs from 6th April to the 5th April the following year.
  • What are the current income tax thresholds? For example, the personal allowance is £12,570 this tax year. You don’t pay any income tax on a salary below this threshold.
  • What are the current Employees’ and Employers’ National Insurance thresholds?
  • Do you want to ensure you get a credit towards your State Pension entitlement? You will need to make sure your salary is higher than the NI Lower Earnings Limit (£6,396).
  • Do you have a contract of employment with your company? It may state that you must pay directors and/or employees a minimum salary.
  • It is worth paying yourself a salary, as you save a minimum 19% Corporation Tax on this amount, which would otherwise be taxed as company profit.
  • Your company’s savings will be higher if its annual profits exceed £50,000 as the CT tax rates increased in April 2023.

The optimum salary for contractors in 2024/5 is £12,570. Find out more here.

Why can’t my accountant tell me what salary to choose?

If you have an accountant, they will typically only provide rough guidance when you set your salary for the current tax year.

This is because accountants do not want to risk being caught by the Managed Service Company (MSC) rules.

The MSC legislation was put in place to outlaw service providers who have too much control and influence over their clients’ tax affairs.

This is why choosing the optimum salary level is a task which should be carried out independently by directors.

Partner Contractor Accountants

Last updated: 21st March 2024