Paying yourself from a small company
The first time a new director asks “so how do I get paid?”, the honest answer is “carefully”. The company earns the money. You own the company. But moving cash from one to the other has rules, and the rules decide how much tax gets paid on the way. Here is the shape of it.
Two routes out
Salary is paid through payroll, like any employee. It is a cost to the company, which reduces the company’s profit and therefore its tax. You pay income tax and contributions on it through the payroll, and it counts towards your pension record.
Dividends are paid out of profit that is left after company tax. They are not a cost to the company. You pay dividend tax on them personally, at rates that are usually lower than the rates on salary, but only if the company actually has the profit to pay them from.
Most directors of small companies take a modest salary and top it up with dividends. The right mix depends on the current rates, on whether you have other income, and on what the company can afford, so we work it out each year rather than copying last year.
The two mistakes
The first is paying a dividend the company cannot support. A dividend has to come from profit after tax. If the accounts later show there was not enough, the dividend was not lawful and has to be treated differently. The fix is simple: know the profit before you pay, which is what the monthly summary is for.
The second is treating the business account as a personal one. Every transfer that is not salary, a dividend or a repayment of money you put in is a loan from the company to you. Loans that are still outstanding at the year-end can trigger an extra tax charge on the company. Regular, labelled payments avoid the problem entirely.
What we do each spring
Before the new tax year we look at the forecast profit, your other income and what you need to live on, and set a salary level and a dividend schedule for the year. Then payroll runs on its own and dividends are paid quarterly, with a minute and a voucher for each one, which is what keeps them lawful. You approve the amounts on your phone; nothing else changes.
If the year turns out better or worse than planned, we revisit. That is a ten-minute call, not a redesign.
This is general information, not financial advice. The right salary and dividend mix depends on your own figures and on the current rates, so have it calculated before you rely on it.
