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October 23, 2020

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When factoring in whether you should start a Limited Company or start contracting, it's useful to understand how your pay works and the assumptions behind them.

Here's a few factors you need to know:

Limited Company Director Salary

As a contractor or single director of a Limited Company you'll have corporation tax, VAT and expenses to factor into your company.

Typically, Limited Company directors will set themselves up with a PAYE salary of £8,788.

This is the maximum salary you can take before you start paying National Insurance and taxes.

Director Dividends

Given that you'll be on a salary of £8,788 per year then you'll take money out of your business in the form of dividends.

These can only be paid out from company profits and your take rate will change as you take out more.

You can read up all about dividend thresholds here.

Corporation Tax

Corporation Tax is currently set at 19% for UK companies.

This is calculated on your company profits: Total Revenue - Total Expenses.

Expenses

You'll have a range of different expenses you can claim as a Limited Company like a work laptop, business travel, insurance and accounting.

If you have expenses incurred as a result of running your business then should absolutely claim for these.

If you don't, then you'll not only pay a higher corporation tax i.e.

£40,000 profit * 19% = £7,600 in corporation tax

£35,000 profti * 19% = £6,650 in corporation tax

You'll also be paying a higher tax rate on the dividends you've taken out.

If you go above the £50,000 income tax band then you're dividends will be charged at 40% rather than 20% - so this can make a huge difference!

Read our utlimate limited company expenses guide.

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