What are my wages as the director of a private limited company?

If you’ve decided that 2019 is the year you will become a contractor, congratulations. Following the excitement of setting up your own company and choosing which contracts you want to work on, you’ll probably start to think about how you will get paid.
Well, there’s some good news for you, as this article covers everything you need to know.

Overview of a limited company

We define a limited company as “a type of business structure that has been incorporated with Companies House and which is separate to its owners.”
As it is a separate legal entity to you, the money held within the company does not belong to you, it belongs to the company. To take a salary from the business, you can choose to do it through:
PAYE
Dividends
Or, a combination of both

PAYE (Pay as You Earn)

PAYE works in the same way as when you were an employee i.e. your salary is run through a payroll and your tax and NI is calculated and deducted leaving you with a net pay. As a director of a limited company who opts to get paid via PAYE, you will first have to register for the PAYE scheme. Once this is completed, HMRC will issue you an office and PAYE reference.
You will then be required to submit reports, known as Real Time Information (RTI) on or before each pay-run. You can choose to do this weekly or monthly. Our experience shows most contractors choose to do it monthly.
PAYE is maybe the simplest way to get paid, but not necessarily the most tax efficient. This is because you will be paying PAYE Income Tax and National Insurance Contributions (NIC) on your monthly salary. A way to get around this is to pay yourself a small salary (under your personal allowance) but just enough to cover your National Insurance threshold (£8,424 for 2019/19). This equates to a monthly salary of approximately £702.

Dividends

Dividends can be paid to shareholders of a limited company. It’s therefore important you make sure you are a shareholder as well as a director of your limited company. If there is more than one director, you all have to agree before dividends can be paid. Most importantly, dividends can only be paid when the business has made a profit.
Dividends can be paid out as often as you like, but most contractors choose to do it once or twice a year.
The procedure for paying out dividends is as follows:
Make sure the company has made a profit
Arrange a directors meeting (yep, you’ve still got to this, even if it’s just you!) and make minute notes of what was agreed
Generate a tax voucher for each shareholder – a tax voucher is a statement which outlines details of the company and each shareholders net dividend and tax credit
Issue the dividend payment and tax voucher
Submit the minute notes from the directors meeting with your registered office

Which is best?

We frequently get asked this question. The truthful answer is, it depends on the nature of your business. However, in the majority of cases, we advise our clients to take a small salary (roughly around the NI threshold) and the remainder by dividends.

Check out our ‘guide on contracting’ to get more useful advice on setting up as a contractor.

Working out how to take a wage as a director of a limited company can be complex, particularly if you are not fully versed in the numerous tax reliefs that are available to you. Don’t panic though. We are here to advise you on the best way to get paid. Give us a call on 01962 867550 or send us a message via our website.