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Many contractors choose to become a limited company director, as it can be significantly more tax-efficient than working through an umbrella company, or as a sole trader. As a limited company director, you have access to a variety of methods to maximise your take-home pay.
So, after taking the leap into contracting, the last thing you want to do is give away too much of your hard-earned cash by working in a non-tax efficient way. When it comes to paying yourself, there’s a few ways you can do this:
Of course, the method must be right for you and your circumstances. To help you make a well-informed decision, we’ve explained everything you need to know.
A director's loan is when is when you get money from your company that is not:
Records must be made of any directors loans made or paid back into the company, and taxes are sometimes applicable.
Any cost which you have incurred personally, which has been made exclusively for the purpose of your business, can be claimed as a legitimate business expense. Whilst your business will receive tax relief on these expenses, you will also be able to reimburse yourself personally.
The main bulk of these expenses typically include business miles, insurance and equipment, but can include any necessary costs. Although business expenses are unlikely to make up a large portion of your take-home pay, this is a useful way to maximise your tax efficiency. This includes pre-incorporation expenses.
Once your limited company has started making a profit, these profits will be subject to Corporation Tax of 19% (2022/23), but the remainder can be paid to directors and shareholders in the form of dividends. This is a way of dividing up the company's profits and distributing them based on the percentage of the company they own.
Dividends can be paid at any point during the financial year, providing there are retained profits available. It is entirely your choice as to when and how much you pay.
To take dividends out of your limited company, you will firstly need to hold a meeting with your company directors to declare the dividend. A dividend voucher must also be given to each shareholder, outlining the dividend paid.
We've been providing expert accountancy advice and helping contractors to focus on doing what they do best since 1992.> Finding a Contract Guide Take Home Pay Calculator IR35 Guide for Contractors
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Appointing an accountant can save you time and stress when starting up on your own. If you would like to speak to someone about any of the above information or any other queries you may have, arrange a callback and a member of the team will be in touch.