When you own a small business, it is crucial to know how to pay yourself, and in the most beneficial way from a tax point of view. To be honest, get this wrong and it will cost you money!
Paying yourself tax efficiently is about:
- Setting the levels at which you pay yourself your salary
AND
- Doing so at the most tax efficient points
This new blog is our short guide to one option, so you can pay yourself more and the tax office less! In this example, we presume:
- You are a typical small business owner with a limited company
AND
- You are both a shareholder and a director
The basics
For many small business owners, ‘the best’ way to take money from your limited company will be a combination of :
- A small salary
PLUS
- The rest in dividends (from the profit)
The overall tax saving achieved is a combination of corporation tax, National Insurance and personal tax savings. You will likely pay a tax efficient balance of all three taxes.
There are other good reasons for paying yourself this way. For more info:
- Read our blog on Director’s payroll
- Check out our blog on how dividends work
So, what is ‘the best’ level of salary for 25/26?
Let’s get the standard accountant’s answer out the way first: “It depends”.
Any answer to this question will be very specific to your individual circumstances, and your business or personal goals. You should seek specific advice from your accountant or other business financial specialist based on your actual accounts, income situation, goals and figures.
With the official answer out of the way, let’s look at the most common scenario.
As with many small business owners, when your business is your only source of income, you will generally look to set the annual salary in 2025/26 at either:
- Just over £6,500 per year
or
- £12,570 per year
You would then “top up” your pay by paying dividends to yourself, which are National Insurance free and have low rates of income tax. Remember, your business MUST make enough profit to cover the dividends you pay yourself.
Why these values?
£12,570 per year
If your business is your sole income, the £12,570 level is a good use of your personal allowance to gain a corporation tax deduction. You also won’t be paying more National Insurance (personally, or via the company’s contributions) than is necessary.
For example, if you paid yourself a higher salary than £12,570:
- The company would get a further corporation tax deduction
AND
- You would pay some ‘personal’ National Insurance
AND
- The company would have further National Insurance to pay, although that would depend (sorry!) on whether your business qualified for Employment Allowance and it wasn’t used up elsewhere.
Just over £6,500 per year
“Just over £6,500” isn’t an exact tax-efficient number, but clearly exceeds the ‘Lower Earnings Threshold’ (LET) for National Insurance. This means you will gain a state pension qualifying year, which is very important to the amount you might get paid in your state pension. So, it’s crucial to ensure you do pay yourself more than the LET, to lock in that pension-qualifying year.
If you value this pension qualifying year (and you should), you’ll often use this in a scenario where you have other income that uses up some of your personal allowance. This could include a part time job, a self-employed side hustle, or a rental property.
Crunch the numbers
Whilst we’ve shown a couple of the most common scenarios, it’s even more important to crunch the numbers in full if you tick any of the following boxes:
- You have income above £12,570 from other sources
- You are claiming Research and Development tax credits
- You are looking to get a mortgage soon
- You are relatively new in business
- Your company cannot pay you dividends to top up your salary
- Your total income will exceed £100,000
A few other points you might consider
You need to look at further tax planning opportunities if you want to draw from your company, and any of the following apply:
- You have a large director’s loan account where the company owes you money
- Your office is based at home
- You want to pay into a pension
More hassle in 2025/26
With the April 2025 tax changes, your company will more than likely need to pay over funds to HM Revenue & Customs each month in respect of National Insurance contributions, at these salary levels
If you’ve been in business for some time and been receiving tax efficient salaries, you might never have had to do this before. It’s just something to be aware of, as there are variants on when you will be asked to pay it.
How much will I actually save in tax?
Again, it depends (darn it!).
As your paid salary is usually deductible from your company’s profits, the saving on the salaried amount itself is 19% – 25% in corporation tax. This in turn depends on your level of profits. So if you paid yourself £12,570, you’d usually save about £2,380 – £3,140 in corporation tax.
In addition, there are the personal tax consequences. The good news is that if your company ‘pay’ is your only income, then there will not be any personal tax at this level. This is because most owners will have a tax-free allowance that is equal to (or exceeds) the amount of pay.
You also need to factor in a National Insurance bill, and you are likely to want to top up your salary with dividends, which come with a personal tax bill. This is dealt with in your tax return.
The exact tax saved will be a combination of National Insurance, income and corporate tax, so very much depends on your situation.
I’m still confused about how to pay myself
Ask your accountant first as they will have access to all your accounts and can advise you on what tax savings you could actually achieve.
If you don’t have an accountant, or feel you aren’t making the most of the opportunities of a salary/dividend mix with your current accountant, we can help.