And today, I just wanted to continue on our six-part series, How to get paid from your company. So, there’s a few things going on which I’ll just mention first. What I’m going to do is, instead doing six back-to-back videos, plus that seventh introductory one on ways to get paid from your company. I’ve got a bit of feedback. It is a bit tax-heavy. So, what we’re going to do is I’m going to do today’s video. Then take a quick break from the six-part series and then discuss a few other things in terms of business development. And then we’ll come back to the six-part series just to break it up a bit because we all love tax, but seven solid videos in a row of tax is probably a bit much for anyone.
So, that’s all I’ll be doing. I haven’t discontinued the series. All I’m going to do is take a quick break after this video and then get back to it. So, one thing I didn’t mention in my first video, which was an overview of the six ways you could get paid from your company is, I’ll just talk you through it, and I’ll share my screen to show you something. So, I actually wrote a guide a few years back, although I’ve updated it since then, it’s called Your Guide to Limited Company Tax & Finances. It’s not as sexy as our five reasons guide, which I can also actually just show you. So, I’ve written a more recent guide called, 5 Reasons your business is haemorrhaging and cash, as well. So this one’s actually available for download on our website and it’s definitely worth a read because it gives you some really useful advice in terms of making a business highly profitable.
But the guide I wrote, Your guide to Limited Company Tax & Finances, what I’ll do is if anyone wants to join our Facebook group, just comment in this video, we’ll send you the link and then the guide will be in the Facebook group. But there’s section in here called Be tax efficient. And the six reasons guide that we’re talking about kind of covers this… Sorry, it’s six ways to get money out of your business. This section here, section four, page 17 on our tax guide that I wrote actually covers a lot of stuff anyway. So if you ever want a summary of what we’ve been discussing, the six ways guide, then here’s a really good section on it. So yeah, just join our Facebook group and we’ll get that over to you.
But what I’ll do is I’ll stop sharing my screen and I’ll go into the content on this video. So, I actually started off with part three first, which was pensions just because I was getting certain questions about around pensions. So I thought instead of answering those questions, it would better just create that video first. So the people who wanted that information had that information, but I’ll go into the salaries side of it now. So this is really aimed at limited company director owners. So, if you’ve got friends who also run limited companies, they probably mentioned over the years, they take quite a low salary, even though they’re directors of the business. And typically directors have always got paid quite a large salary because of the value they are to the business. Well, not in all cases, but they’re expected to add to the business.
But when you own your own business, it actually often makes sense to take a lower salary and then take money out of the business through other mechanisms like dividends, which I’ll go into in another video. But, the reason directors take a salary is, well, there’s two components of it. Firstly, why should we take one? Or should you even take one? And then the other is how much of a salary to actually take. So firstly, the question to ask is why should you even take a director salary? Why not just get paid in dividends? Why not just take the money out as a loan and never repay it. So I won’t go into the other two, but what I’ll talk about is the salary.
The reason the majority of director owners take a salary is if they didn’t take that salary, they wouldn’t use up their personal allowance for tax. So if you are aware, a personal allowance for tax is an amount of money, you can actually earn from a business or an employment or other sources as well without actually having to pay tax on it. So what the salary lets you do is you can take money out of your business and because it’s a salary, it’s an expense to your business. So what that means is it lowers your corporation tax bill. And because you haven’t had to take it out as a dividend, there’s no dividend tax to pay on it either. So that’s great. What it does is by taking that salary out, you are generating a 25% tax saving overall through your limited company via dividend and corporation tax.
But, because it’s covered by your personal allowance, you don’t have to pay any tax on it. So it means you’ve saved your company tax without having to pay any tax yourself. So there’s pretty much no other mechanism that will let you do that apart from the salary. And if you think about it, you could just take dividends and fine, to some extent dividends will use up your personal allowance. But if you think about it, like putting a salary through is giving you that to 25% tax saving. If you just put the dividends through and didn’t take the salary and just took dividends instead, you wouldn’t get that corporation tax saving. You would only get the dividend tax saving, which works out around 6%. It’s seven and a half, but because it’s tax after tax, it’s really a 6% tax saving. So the idea is, taking a salary is much better than taking a dividend initially.
So then, the question to ask is, well, if salaries are so good, why don’t people just take salaries? Why do they also take dividends? And the challenge with just taking a salary is fine, you’ve got your personal allowance for tax, but you’ve also got national insurance thresholds. So I don’t mean mask me on the exact ones, but let’s just call it nine grand. It’s just under 9,000 pounds. But the point being though is fine, you can actually end up taking your full personal allowance, which I believe is 12,570 pounds this year. And although you don’t pay any income tax on it, you’ll have to pay some national insurance because your national insurance starts at about 9,000, whereas the income tax starts about 12 and a half. So that three and a half you take there, there’s no salary on it, but there is national insurance on it.
But the interesting thing is quite a lot of people don’t take the full personal allowance. And the reason for that is if you think about it, when you have a company you’re not just paying employees national insurance, you’re also paying employers national insurance. So the idea is if you go over that 9,000 pound threshold for national insurance, what’s actually happening is you’ve got to pay the employees and employers national insurance. So it loosely works out about 26%. So the idea is, even going over 9,000 pounds, even though you’re not paying any income tax at that point, you’re still paying about 26% of national insurance, which is worse than the 25% you’re paying dividend tax. So that’s why quite often, even though people could take a salary up to their full personal allowance, they don’t take the salary up to their full personal allowance. They just take enough salary not to pay any national insurance or income tax.
So the question you might be asking then is, well, if I don’t pay any national insurance do I qualify for my state pension? And that’s also a great question. And the answer is yes, you can actually qualify for your state pension without paying any national insurance. And the reason for that is there’s something called the, I can’t remember what it’s called, but it’s about 6,000 pounds, the lower earnings limit. And it’s about 6,000 pounds. And what happens is if your salary goes over 6,000 pounds, but not over 9,000, where you trigger the national insurance, as long as it’s over 6,000, you’ll still get your credit for your state pension. So that’s really important because we often get asked, well the salary you recommended, I’m not paying any national insurance on it. So won’t I miss out on this great benefit. And the answer is as long as it’s over six K in that year, and it obviously has been put through a payroll system so the government are aware of it, then you will then get your state pension credit.
So then the question is why would you want to take salary 9,000 instead of the full 12 and half thousand? Sorry, I did just answer that. So like I said, well, the reason you take the lower amount is so you don’t have to pay all this national insurance. Obviously if you go over the 12 and a half K, you’re not just paying the national insurance, which is 26%, you then stick in another 20% income tax on that. So, over your personal allowance for your business, your tax rate’s more like 46%. So that’s why people switch over to dividends. But, ultimately you’d have to have a really bad accountant to recommend you take rule than 12 and a half grand out as a salary. But there are instances where I’ve recommended that, but for very clear and defined reasons and I can’t go into all those because it would take all day. But just with anything, there are exceptions to the rule. But typically, yeah, it’s rare to come across someone who’s taking more than the personal allowance and salary.
But quite often, if you’ve got all this national insurance to pay on the amount of salary over nine grand, you might think why does anyone take the full personal allowance and salary? And the reason for that is because there’s something called the employment allowance. So not every business benefits from the employment allowance and some businesses do, but they use it all up. But what the employment allowance is, is it’s a discount on your first 4,000 pounds of employers national insurance. So the reason why some business owners take at the full personal allowance of 12,570 pounds as a salary is because if they’ve got access to this employment allowance, which is usually because they’ve got more than one person on their payroll and over a certain amount. And also they might have more than one person, but they don’t have so many people that the full employment allowance has been used up.
Then what’s actually happening is you get access to this employment allowance, which means you don’t have to pay employers national insurance on that amount of 9,000 pounds. So what that means is, although you’re going to take that extra three and a half K to take you up to the 12 and a half K of personal allowance, what’s actually happening is you are only paying 12% employees national insurance of that. There’s no 13.8% employees national insurance. So by paying the extra 12% employees national insurance, you are actually then saving 25% in corporation and dividend tax on that money. So by taking full person allowance, you’ve got another chance to pay next 12% employees national insurance, but then save 25% on your corporation and dividend tax bill.
So overall, a year of employees national insurance costs, I think loosely about 400 pounds, but the savings on the corporation tax and the dividend tax is about 850. So you’re getting about 450 pounds as a tax saving just by doing that. 450 pounds, it’s not the end of the world, but there’s two of you, you’re probably pay for Christmas, or maybe not in my family, because all we have is a small chicken and everyone else is vegetarian. But the point being though is all these little tax segments do add up. So it’s worth thinking about. If your accountants recommended you just take the amount where you don’t pay any national insurance, then fine, but then ask the question, is it worth just paying a bit more national insurance to generate all that corporation and dividend tax saving and take it all the way up to the full personal allowance.
So, there’s a lot more to salaries than I can cover here, but the advice I’m giving, sorry, the video is meant to be a general overview of how salaries and dividends work for limited company owners. So if anything here is interesting for you then just get in touch, join our Facebook group or ask to join our Facebook group and we’ll send you the details and we can discuss things further. But as I mentioned earlier, I’m going to take a break from the six-part series. And what I’m going to do is I’m going to start putting… I think the next mini series I’m going to do is based on why your business needs the sales and marketing funnel.
I know you’re thinking, that’s a bit of an odd one coming from an accountant, but actually a sales and marketing funnel as a process, accountants like me are experts in process and I’m currently building my course, it’s called Million pound processes, which contains the 51 processes every million pound business has. So it’s actually quite a prevalent thing in my online course. So I’m going to be talking about sales and marketing funnels. I won’t obviously be able to go into the same level of details as a sales and marketing expert, but I’ll help you understand the numbers behind it. And then why it’s well worth building that process.
So I’m going to be running too mini series’ in line, so there’ll be this tax element and then there’ll be the marketing bit. And then we’ll switch over to a few other mini series and one off business development videos. So just remember if you found this video useful, then remember to like share and follow. I know it is a bit heavy on the tax side, but I think we’ve got the two big ones out the way. So the next few videos on this mini series should be a little bit easier and more palatable. And hopefully they won’t be going over the five minute mark. Okay, great. Thank you for watching. And I’ll look forward to seeing you soon.