Paying yourself

Now this will probably be an alien concept to most business owners, However if you are in the very lucky position to be able to pay yourself a wage then here is the best way to do it.

So I am going to jump straight in with the good stuff here and tell you exactly what you want to know straight off the bat, However to understand the implications of what this means I would advise reading the whole blog, even though it is a total snooze fest.

Director of a company – you are better off taking a salary of £12,570, £1,047.50 per month and then topping this up with a tax free dividend payments of £1,000 (reducing to £500 in 2024)(if the company has made the profits to pay this out). You will pay a small amount of NI on this if the company cannot claim employers allowance (see below), but with the corporation tax saving it works out more beneficial.

Self employed with no staff – You are taxed on all profits (income less expenses) over £12,570 so there is no point in going through the rigmarole (and cost) of setting up PAYE just for you, just give yourself what is left, but be sure to put some aside for the tax man at the end of the year. They will be coming for tax and NI so around a minimum of 29% of your profits.

Self employed with staff – If you are able to claim the employers allowance then it may be worth putting yourself through payroll as your employers NI will be reimbursed. If this is the case then stick with the above amount of £12,570 or discuss with your accountant.

We all know that HMRC likes to get their cut of your hard earned wages. And then some. Here are some of the ways they like to do this

• Directly from your wages (the personal allowance ((your tax free amount)) is currently at £12,750 for 2023)
  • From there you will pay 20% up to £50270
  • Then 40% up to £125,140
  • After that you are making enough not to care so we won’t continue depressing those of us that are on the bread line.
  • Dividend tax (profits from a business shared amongst the shareholders) 
    • Now here HMRC have been a little generous and actually give you your first £1,000 tax free (reducing to £500 in 2024)… (just bare in mind though that those dividends have come from the profits of the business which have already been taxed!)
    • Then 8.75% at basic rate (between the £12,750 and £50,270 the workers are paying 20% on)
    • 33.75 % at the higher rate (between the £50,270 and £125,140 the workers are paying 40% on)
    • After this we are ignoring those people because they are the ones holidaying on Mars!!

• Capital gains tax, This is for anything large you sold for a big amount of money such as a house (but not your personal one). You pay on what you made so if you bought a house for £150,000 and sold it for £200,000 then you pay capital gains based on the £50,000 you made.
  • Now here HMRC have once again been generous and they give you a tax free allowance of £6,000 (used to be £123,000!!).
  • From here there are a whole load of %’s they take based on different things so I won’t bore you with all of those details. If you have made a capital gain of over £6,000 then give us a shout and we can help you out, alternatively you can find the current information here.

Now for the NIC’s.. the other ones who like to take it before you have earned it. To be fair though, these annoying little contributions do pay for your healthcare and pension so maybe not quite as bad. Just be very mindful that if you do want to receive your state pension when you retire then you must have contributed to your national insurance for at least 35 years, if not you will be left on the streets to starve!

So there are 2 different kinds they take from you here, and this changes if you are employed, so if you are paying yourself AND employees then you will get stung 3 ways!

So for the self employed you will pay

• Class 2 NI if you earn more than £12,570, this is at £3.45 per week so £179.40 a year
• Class 4 contributions if you earn over £12,570 you will currently pay 9% on all profits between £12,570 and £50270 then 2% on anything over.

The Employed 

• Employee Ni’s which are again at all kinds of different rates depending on your age and circumstances and these are given a very special little number code. To see the different rates you can click here. They are generally however 12 % on all earnings over £242 pw, £12,570 per year.
• Employer NI’s are currently at 13.8% based on earnings over £175 pw, £9,100 per year, this does not apply to everyone though, the list of who will pay is here.

So now we know all the ways in which HMRC likes to take your money. Let’s see all of the ways we can keep it.

So there are a number of tax reliefs out there which can work to all of our advantages. 

• If you love to give to charity like we do then this is a biggie (only if you are a ltd company, you can put it through as an expense).
• Contributing to your own pension pot which will mean you wont pay any corporation tax, income tax or NI contributions on up to £60k paid in to your personal pension per year.
• Maintenance payments are also a tax relief. 
• Any expenses paid for work purposes such as computers and office equipment, training costs, medical insurance, travel expenses etc etc can also be deductible.

To know all of the things that you may be able to claim back then please do get in touch.

If you are employing more than one employee (including yourself) and won’t be/ haven’t paid more than £100,000 to HMRC for NIC in previous years then you are also in a position to be able to claim Employment allowance, This can reduce your NIC bill by £5,000 a year! 

Now, as a small business owner, who wants to actually get paid themselves, given all of the above information, you need to think about the following.

• How many employees do you have?
• Are you contributing to a personal pension?
• Is your company in a position to be paying dividends (if you are limited)?

Totally worth those 80 hour + work weeks wouldn’t you say!!