- Pay As You Earn - the salary system. To do this, you will need to register with the HMRC and you might have to pay Income Tax and National Insurance contributions, depending on your income level. The optimal salary in 2021/22 is the lower threshold of £9,568 per year. This salary will also give you the right to future pension and state benefits.
- Dividends - are exempt from tax up to £2,000. Any amount above this amount and up to £37,699 is taxed at 8.75% (7.5% + 1.25%), from April 2022. By taking a combination of a low salary and higher dividend payments, you could pay a significantly lower personal fee than if you were self-employed and you would really see the benefit of working as a Director in your own company.
- You should also take into consideration the 19% Corporation tax which is payable on your profits, 9 months and 1 day after the end of the financial year.
This means that in total you will pay 27.75% (8.75% on dividends + 19% corporation tax), which is once more beneficial than being Self-Employed where you could pay a minimum of 32%
- Lastly, you can contribute to a pension and get 100% tax relief as an allowable expense. Your contributions are tax-free as long as the amount falls under the annual allowance of £40,000 (2020/21 tax year).
Pension decisions are often complicated and require careful consideration. We recommend speaking with a financial advisor for personalised advice before you make any contributions.