Now you have a limited company you will no doubt be keen to pay yourself for
your efforts. There are a number of different methods for extracting money from
your company that you should consider and decide upon based on your requirements
and individual circumstances. This guide is intended to cover two of the most
popular methods and is specific to paying yourself rather than your employees.
An important thing to remember first !
When you incorporated your limited company you created a new entity that is
separate from yourself, the company will have its own assets, liabilities and
legal status. As a director you will be responsible for managing the company and
as a shareholder you will own part or all of the company entitling you to the
business profits and any gains made if the company is sold. It is this
distinction that you should remember once the company is trading and receiving
payments. The money you collect through your business is not yours to take as
and when you please, the money belongs to the company and you must extract any
remuneration through an appropriate channel. This can be something that eludes
many new company owners, particularly if you are accustomed to operating as a sole-trader.
What is PAYE?
PAYE stands for Pay as you Earn and is a scheme managed by HM Revenue and
Customs (formerly The Inland Revenue) to collect tax at source from any
remuneration made to the company's employees. If you have come from full time
employment then the chances are you were paid using your company's PAYE scheme.
PAYE is set to be replaced by Real Time Information (RTI) in April 2013.
How does PAYE work?
The way PAYE works is simple, every month (or week depending on how often you
wish to pay yourself) you decide the gross amount before tax that you would like
to pay as your salary. You then calculate the amount of Tax and National
Insurance that would be due, this will be dependant on your tax code (The
Revenue will inform you of this when you setup your PAYE scheme). To calculate
your Tax and NI contributions you can either use the old fashioned manual method
of using the tables supplied by the Revenue or you can use a computerised system
such as Sage Instant Payroll. After completing this you will have a net figure
that can be paid to you from the company and a liability for the Tax and NI that
must be paid to the Revenue.
The above is a simplified analogy of how an individual might pay themselves
using the PAYE system. There are a few other things to remember though.
- If you are a director then the National Insurance calculations are slightly
different to that of a regular employee.
- The above example does not take into account any deductions made from the salary
such as Pension or student loan contributions.
- A limited company must also pay National Insurance whenever an employee is paid
using the PAYE system.
How do I setup a PAYE system?
You can setup a PAYE system with the Revenue by contacting their employer
helpline (0845 7143143). They will then send out all the forms and guidance that
you will need to start paying yourself through this system.
What are Dividends?
Dividends are basically payments made to company shareholders from the profits
of the company. If the company has not made a profit over a given period then it
cannot pay a dividend. Most large public limited companies pay a dividend either
once or twice a year, effectively it is a reward to shareholders for investing
in their company. It is up to the directors of the company to decide if and when
a dividend can be paid to the company's shareholders.
Although dividends tend to be associated with large PLC companies, small private
companies can also pay a dividend at anytime providing there are available
profits in the company.
How are Dividends taxed?
Dividends attract corporation tax payable by the company and may also raise a
personal tax liability in the way of income tax. The corporation tax liability
is calculated and paid to HM Revenue and Customs at the end of the company's
financial year and takes into account the overall profit of the company and any
dividends (or so called distributions) that have been made over the period. In
this respect it is difficult to estimate the amount of corporation tax payable
when the dividend is issued. As previously mentioned though you must ensure that
the company has the available profit to make the net dividend payment and the
additional tax liability, this must surpass any uncertainty and we would suggest
that you estimate the corporation tax liability as over 19% of the net dividend.
If a company pays a dividend that cannot be supported by its profits then it is
Assuming that there is sufficient profit in the company you can continue to
issue the dividend to your shareholders. The shareholders must be paid on a
pro-rata basis in accordance with how many shares they hold. Once the
shareholder has received his or her dividend then there may be an additional
personal tax consideration depending on their annual earnings. The rates of tax
on dividends are as follows:
Annual Earnings (2011-2012 figures)
Up to the basic rate (Up to £35,000 ) 10%
Higher rate (£35,001 to £150,000) 32.5%
Additional rate (£150,001 and above) 42.5%
This means that ordinarily if you were earning under £32,400 per year you would
incur a 10% tax liability on the dividend you received. However dividends carry
a tax credit of 10% thus cancelling out the liability. On the other hand if you
are earning over £32,400 per year then you would have an effective rate of 22.5%
(32.5% ? 10% tax credit).
How do I issue a Dividend?
Here are the basic procedures for issuing a dividend.
- Ensure that there are sufficient profits in the company to allow for the
dividend. It is recommended that you print a balance sheet and profit and loss
account for the period to remove any doubt.
- Call a meeting of the directors to minute the decision and details of the
- Generate a tax voucher for each shareholder. A tax voucher is a simple statement
showing the company and shareholder details along with the individuals
shareholding net dividend amount and tax credit.
- Issue the dividend payments along with the tax vouchers and file the board
minutes and accounts at the registered office.
It all may sound a little complicated at first but the more times you go through
the process the easier it becomes also it may be worth understanding the nature
of dividends as there may be distinct financial advantages for both you and your
PAYE vs Dividends
The question that many new company owners ask is should I pay myself using the
PAYE system or Dividends. The answer is very much dependant on circumstances and
in fact many individuals choose to use a combination of the two. Below are some
pointers to help you decide on the right format for you and your company.