Tax efficient ways to pay yourself: salary or dividends? Updated for 2015/16

Editors note: originally published 6 April 2012 and republished each year since as changes in tax law were announced.

A common and sensible question that small business owners trading through a limited company often ask is ‘how do I pay myself in the most tax efficient way’?

The answer to this question is refreshingly simple: use a mixture of salary and dividends.

Salary

Salary is the term used to describe money paid to you as an employee of the company. Money paid in this way must be taxed at source (i.e. by the company before it is passed to the employee). This scheme is called PAYE (Pay As You Earn) and ensures that companies deduct both income tax and national insurance from employees salaries and pay it directly to the tax man.

Pay £671 per month as salary

Optimising salary is mainly about National Insurance thresholds.  You need to pay enough salary to avoid gaps in your record but not so much that you start to incur National Insurance payments. In most cases you should pay yourself a small salary that falls just below the limit at which national insurance becomes payable. For the tax year 2016/17 this figure is £671 per month. Continue reading “Tax efficient ways to pay yourself: salary or dividends? Updated for 2015/16”