When can I pay myself as a Limited Company Director?

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A dividend is a payment of profit that a limited company distributes to its shareholders. This is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off.

Dividends are important as they are a tax-efficient way to pay yourself from your limited company. Other than drawing dividends as income, you may also consider paying dividends into a pension fund, ISA or to family members.

To pay an overseas supplier, you need to:

• Decide on a payment currency
• Select a payment method: There are various payment methods and payment service providers available, including bank transfers, credit card payments, PayPal and TransferWise. When you're choosing a payment method or provider, you need to think about the currencies available, fees, exchange rates, speed of international transfers and payment reconciliation capabilities.
• Obtain the information you need to process the payment: You may need to obtain different types of information from your supplier, depending on the payment method you agree on. These may include their full name and address, bank account number, routing number and branch number and address.

As a limited company director, you have greater flexibility to work around the tax system, and are able to implement tax optimisation strategies not available via other business structures.

One of these ways is to draw dividends from your company, as opposed to receiving a salary; doing so can help to reduce your tax bill.

If you're newly self-employed, this can be rather confusing.

You might be wondering: How can dividends help reduce my tax bill, and what taxes do I need to pay on them? Are there additional considerations I need to keep in mind?

These are the questions we'll be answering below:

A director's loan is defined as money taken from your company that isn't either of the following:

• A salary, dividend or expense treatment
• Money that you've previously paid into or loaned the company
  

A Director's Loan Account (DLA) is a record of all transactions between the company and its directors. It records not just the money owed by the directors, but also the money owed to them.

Director's loans can be used:

• when you need to access money in your company-apart from what you take out as a salary, dividend or expense treatment-for personal reasons.
• for a variety of purposes, such as covering the costs of a home repair bill, travel plans or any unforeseen personal expenses that may arise.

If you're operating as a sole trader, you can contribute to a personal pension scheme.

If you're a limited company director, you can make pension contributions as an individual (as an employee), as well as through your company (as an employer). For the latter option, your pension contributions are paid directly from your business bank account.

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As a limited company director, you're classed as an office holder. You aren't automatically an employee at your company-even if you're the sole director and only person working in the business.

It's isn't mandatory to be set up as an employee at your new company. However, there are benefits to doing so if you aren't employed elsewhere, as you'll be able to take advantage of your tax free allowances.

A contractor working through their own limited company can pay themselves through a couple of ways such as paying a salary and paying dividends. There are a few factors that need to be considered when deciding the best way to go about this.

For example, when operating inside IR35, contractors will be restricted to paying themselves a salary however when operating outside IR35 the doors are opened to maximise tax efficiencies.

As a limited company director, you can pay yourself through:

1. Taking a salary

As the director of a limited company, you're also considered an employee. As such, any salary you draw will be paid through the PAYE scheme-similar to how other employees of the company will receive their pay.

You'll run a payroll, report to HMRC and receive your salary (after taxes have been deducted at source).

2. Dividends

A dividend is a payment of profit that a limited company distributes to its shareholders.

While dividends can be drawn at any frequency across the year-as long as there are sufficient distributable profits-payments are typically made on a monthly or quarterly basis.

Unallocated payments are where the client has given you more money than they owe.

If you're self-employed, HMRC will work out your loan repayment amount from your tax return. You make your repayment the same time you pay your tax.

If you're an employee and your salary is above the minimum amount, your loan repayments will be deducted from your salary by your employer.

Additional repayments can be made through your online repayment account and by card, bank transfer or cheque.

• What is a Limited Company
• 10 step process for setting up a Limited Company

As a contractor, how you pay yourself will vary depending on whether your contract is subject to IR35.

• Contract subject to IR35 (inside): Salary
• Contract not subject to IR35 (outside): Salary, dividends + reimbursing any expenses you have paid for out of your own pocket
  

We've provided a more detailed explanation in our Forma Help Center resource.

There is no clear cut time as to when you should start working through your own limited company. With other routes available-such as operating as a sole trader, or working through an umbrella company-it is always worth weighing up what is best for you and your circumstances.

With that being said, if you plan to work as an independent contractor for the foreseeable future, opening your own limited company at the early stages can maximise your opportunities for reaping the benefits of having your own company straight away.

The advantages to setting up a limited company are:

• Owners aren't fully liable
• Tax savings
• Using a limited company structure lends credibility to your business
  

If you're paying an employee for the first time, you'll need to set up payroll. You need to take the following steps:

1. Register as an employer with HM Revenue and Customs (HMRC) and get a login for PAYE Online.
2. Choose payroll software to record employee's details, calculate pay and deductions, and report to HMRC.
3. Collect and keep records.
4. Tell HMRC about your employees.
5. Record pay, make deductions and report to HMRC on or before the first payday.
6. Pay HMRC the tax and National Insurance you owe.