Wage Strategies in a Limited Company
How Much Should You Pay Yourself?
There’s no denying the benefits that come with setting up a limited company, but contracting through a limited company does come with a few hurdles that being a sole trader or freelancer doesn’t. One of these is working out how much to pay yourself. When you’re employed, your employer determines your wage. When you’re a self-employed freelancer, most of what you earn is taken as income, with a handful of business costs taken out. But, when you set up a limited company, there are a few other things to consider. As it’s your business that’s making the money, rather than you as an individual, you need to find a way to pay yourself.
At Go Limited, we know there are a few different wage strategies to choose from when you have a limited company, and this can make it difficult to know where to start. You’ll need a salary, but how high should that be? You know dividends are an option, but what’s the benefit of including those in your income? These are all valid questions, and we’re here to help.
Managing Your Limited Company Wages
When you’re running a limited company, your wages aren’t just about paying yourself and making sure that you have enough to spend, or even enough to live a somewhat luxury lifestyle; it’s about managing your finances efficiently across the board, finding a balance between paying yourself and keeping your business afloat. Once you’ve set up a limited company for contracting, you’ll need to decide how to split your earnings between a regular salary and dividend payments. This looks slightly different from person to person, limited company to limited company.
When it comes to earning money, the first thing you think of is probably a salary, the money you’re given monthly as a reward for your hard work. But, there’s also another reason for paying yourself a salary. Even if you’re setting up your own limited company, paying yourself a salary is essential for contributing to National Insurance and maintaining your eligibility for state benefits and pensions. If you don’t pay yourself a salary, you could fall short and get to retirement age, only to find that you don’t qualify for the full pension amount. To avoid this, most people who are contracting through a limited company choose to pay themselves a salary slightly above the National Insurance threshold, as a way to minimise tax liabilities, whilst also staying eligible.
As an alternative to paying yourself a larger salary, you might choose to pay yourself in dividends. These are payments you can make to yourself from your limited company profits after corporation tax. As dividends are taxed differently from salaries - they have a lower tax rate - and so paying yourself in this way can minimise your tax liabilities, meaning you get more out of your income.
How Much Should You Pay Yourself If You’re Contracting Through a Limited Company?
When you first start contracting through a limited company, you need to decide how much to pay yourself. It can be tempting to simply just take money out of the business as and when you need it, but it’s better to have a strategy in place.You need to decide how much to pay yourself, as this requires you to balance your personal income with the financial needs of your business.
The exact amount you pay yourself will vary hugely, depending on how much money your limited company is bringing in and how much you need to earn to maintain your lifestyle. But, when you’re deciding how much to pay yourself if you’re contracting through a limited company, there are a few key things to consider.
Determine Your Salary
When it comes to deciding on a wage strategy when you’re setting up a limited company, you need to determine your salary. This doesn’t mean looking at what other contractors in your field are being paid and copying, it means working out how much you can pay yourself whilst also being tax efficient. For a lot ofcontractors, the answer is to pay themselves a salary that falls just above the National Insurance rate, which for the 2024/25 tax year is £12,570. By basing your salary off this, you make sure that you remain eligible for state benefits by paying National Insurance, whilst also paying a minimal amount of tax on your salary.
Boost Your Salary with Dividends
As a small salary is unlikely to be enough, boost your salary by using dividends for additional income. As dividends are taken from your business’ profits after tax, they are taxed at lower rates tosalaries. For example, the basic tax rate for salaries is 20%, but the basic tax rate for dividends is 8.75%. For higher rate taxpayers, the rates are 40% and 33.75% respectively.
Keep Profits in Your Business
It’s tempting to pay yourself a hefty salary - after all, who doesn’ want a large payment arriving in their account each and every month? - but you need to make sure that some profits stay in the business. Keep enough money within the company to cover operating expenses, growth opportunities and unforeseen challenges. There’s bound to be a time when you need to invest in equipment, training or future projects, and you need the money to do so readily available.
Keep Money Aside for Tax
Regardless of what you do and the industry that you work in, you need to keep moneyaside for limited company tax. You need to set aside a percentage of your earnings to cover corporation tax, dividend tax and VAT, if applicable. The amount you set aside will depend on if you’re a basic or higher ratetaxpayer, but most contractors reserve 20% to 30% of their income to cover tax obligations.
Factoring in Limited Company Tax
When you’re deciding how much to pay yourself, you need to factor in your limited company tax obligations. For example, you’ll need to pay corporation tax on your business’ profits. This is currently set at 19% for businesses making under £50,000 per year, and 25% on those with profits over £250,000. Reducing taxable profits through allowable expenses and pension contributions can help lower these costs, which is why it’s important to understand tax deductibleexpenses for a limited company.
It’s also important to remember that though dividends are taxed at lower rates than salaries, the rate of which they’re taxed does increase as you move into higher tax brackets. You’ll need to monitor your total earnings to avoid unexpected tax bills.
Tax Deductible Expenses for a Limited Company
There are a lot of advantages that come with running a limited company as a contractor, one of which is having the ability to claim allowance expenses for a limited company, reducing your taxable profits. By claiming allowable expenses, you minimise your tax bill and maximise your income. This is something to consider when you’re deciding how much to pay yourself, as claiming them can lower your taxable income whilst also ensuring that your business is well-equipped and competitive.
Travel and Accommodation
When you’re managing taxes as a contractor within a limited company structure, you need to keep track of any travel you do that’s related to your business, as well as accommodation for overnight stays if you’ve had to travel for work. This includes mileage if you’ve driven, train tickets, hotel costs and even flights.
Office and Workplace Costs
There’s a lot of overheads when you’re contracting, but office and workplace costs can be included as limited company tax deductions. This includes rent, bills, office supplies; even a portion of your home office costs are deductible if you work from home.
Professional Services
As a contractor with a limited company, you’re bound to pay for some professional services, and these costs can be included in your limited company tax deductions. This includes contractor accountants, legal services and business consultants, all of which can be claimed as allowance expenses.
Training and Development
Courses or certifications directly related to your business activities qualify as allowable expenses, and can be included as tax deductible to reduce your tax liability. Not only does this lower your tax bill, it also makes training and development slightly more affordable.
Equipment and Technology
Regardless of the industry you work in or the services you provide, you’re sure to have a need for equipment and technology in some form. Expenses such as costs for computers, software, tools and other essential equipment are tax-deductible.
Important:
- Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
- When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.
At Go Limited, we know there’s a lot to think about as a contractor with a limited company, but knowing how much to pay yourself should be at the top of your list. There are various wages strategies in a limited company but, by putting the time into researching the various approaches, you’ll be able to find a way to balance paying yourself enough, whilst also making sure that your business continues to thrive.
