Limited Company Salary and Dividends

In a Nutshell

Pay-day

In a Sentence

This is what you are a contractor for - the bottom line, better paid and a better career than full-time employees!

When you contract through your own limited company you can choose how you pay yourself. There are no government rules to abide by, and it's normal to be paid through a combination of; salary and dividends. You will also get business expenses.

For the majority of contractors the game is to minimise the tax bill. After all, it's legal and a rather nice by-product of the freelance career choice.

Down with Tax

This is a good time to get some outside professional advice and a key element of using the services of a specialist contractor accountant. You really want to get this part right, otherwise a major element of being a contractor in the first place will be scuppered.

Unlike full-time employees, your total personal income will be made up from two elements:

1. Salary
2. Dividends

Expenses are not income and you'll find they don't boost, or drain, your overall earnings. But expenses are important to understand and are the third key revenue channel.

When Less Means More

Don't rush to take all your money as a dividend(s) thinking this is the most tax efficient way. If you do you'll be throwing away the tax free part of a salary.

Check out your tax code, it will be something like 747L for 2010/11 tax year. This means you can earn a salary of £7,475.00 with paying any income tax, so it would be crazy to throw away this little gift from HMRC.

Good Bye NICs

Your limited company will pay out a dividend(s) from the net profit to the shareholder(s). You take a dividend whenever the company can afford to pay them - however many times a year you want.

Dividend payments have the extra bonus of being linked to tax credits, which off-set the limited company's Corporation Tax. And the added benefit of income via a dividend(s) is that it will be taxed just 22.5% - there's no National Insurance Contribution (NIC) on dividends. Win-win!