Resources

Contractors and Freelancers: How Should You Pay Yourself?

Blog
Contractors and Freelancers: How Should You Pay Yourself?

The freedom of working for yourself is pretty unrivalled when it comes to making a living. Somewhat erratic wages are a natural by-product of working around clients who have their own schedules and priorities, and freelancing means you’ll have to weather the peaks and troughs to achieve self-sufficiency.

What can be difficult is knowing how much to take from your gross earnings, and how to declare them for tax purposes. Do you carry on as a sole trader, or incorporate your business to become more tax efficient? Let’s look at how you should pay yourself to minimise your tax bill and maximise financial security.

Going It Alone

Sole traders face a basic tax rate of 20% up to the threshold of £43,000 per annum. This includes a personal allowance of £11,000, meaning the remaining (potential) £32,000 of taxable income is liable for a 20% slice of the pie. Above this, tax rates jump to 40%.

Your taxable income determines how much you owe after fixed costs, overheads and tax relief are taken into account, which makes it crucial to stay on top of your incomings and outgoings to ensure you have enough to pay yourself and your tax. There’s plenty of great accounting software out there for freelancers and contractors to streamline their bookkeeping.

It’s wise to establish a regular wage for yourself, rather than treating your business bank account as a pot to dip in and out of. Bear in mind that cash flow issues can be avoided by withdrawing the same amount each month, regardless of whether your profits have shot up or down. This will give you more long-term security and provide ample room to invest in growth when the time calls for it.

Paying Dividends

Whilst setting up as a sole trader is extremely simple, many contractors and freelancers incorporate their businesses in the long run, to become more tax efficient. As the owner of a limited company you’re also a shareholder, meaning you can be more flexible in the way you withdraw your profits.

Limited company owners can withdraw their profits in two ways – as a salary, and as dividends. As with sole traders, your salary is subject to 20% income tax after £11,000, whereas dividends are taxed at a much lower rate of just 7.5%.

With this in mind, the most tax-efficient way to pay yourself operating under a limited company, is to pay yourself an annual salary under the £11,000 personal allowance, and withdraw the rest as dividends. Furthermore, as dividends are subject to a £5,000 allowance, you can make savings here too.

Getting to grips with freelancing and contracting can be difficult at first, but with the help of a specialist accountancy firm (that’s us!), you can get your head around tax implications and understand how best to pay yourself.

Looking for expert advice on taxation and take home pay? Bright Ideas Accountancy can help with all of your accounting needs. Call us on 0161 669 4221, or email Info@biaccountancy.com for a quote.

 

To book in a FREE consultation, contact us today on 0161 669 4221 or info@biaccountancy.com.

Stay up to date on what’s new at Bright Ideas.

    Step 1 of 3

    Thanks for choosing Bright Ideas!

    Let’s get started with a few details…

    (*) Required field
    The field is required
    The field is required
    Email address is invalid
    The field is required
    By submitting you agree to our Privacy Policy

    How can we help?

    I need accounting support for…

    (*) Required field
    The field is required
    The field is required
    The field is required
    The field is required
    The field is required
    £The field is required
    The field is required
    The field is required

    When’s good for you?

    Pick a slot…

    (*) Required field
    The field is required
    The field is required
    The field is required
    BACKLet's get started
    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

      Step 1 of 2

      Become a client

      Let Bright Ideas take care of your accounting. We’re guaranteed to have a solution here that suits your needs. Simply pick the package you like best and we’ll take care of the rest.

      You can sign up for our services right now. Complete the form below and we’ll be in touch the same day (if received before 4pm).

      (*) Required field
      The field is required
      The field is required
      The field is required
      The field is required
      Email address is invalid
      The field is required
      The field is required
      The field is required
      The field is required
      By submitting you agree to our Privacy Policy

      Let’s talk about your business

      Setting up a new business? Already trading as a Limited Company? No matter what your circumstances, Bright Ideas can help.

      (*) Required field
      The field is required
      The field is required
      The field is required
      The field is required

      Included in our company formation service is:

      • Limited Company name of your choice
      • Memorandum and articles of association
      • VAT, PAYE and Corporation Tax registration
      • Certificate of incorporation and Share certificate
      • Companies house registration
      (*) Required field
      The field is required
      The field is required
      The field is required
      The field is required
      The field is required

      Director/Shareholder

      (*) Required field
      The field is required
      The field is required
      The field is required
      The field is required
      The field is required
      The field is required
      The field is required
      The field is required
      The field is required
      The field is required

      Additional director or shareholder (Should only be completed for an additional person)

      The field is required
      The field is required
      The field is required
      The field is required
      The field is required
      The field is required
      The field is required
      The field is required
      The field is required
      The field is required
      The field is required

      Declaration acceptance *

      The field is required
      The field is required
      BACKLet's get started
      This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

         

        Request a Call Back

        (*) Required field
        The field is required
        The field is required
        Email address is invalid
        The field is required
        By submitting you agree to our Privacy Policy
        This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

        Pin It on Pinterest

        Shares
        Share This

        Share This

        Share this post with your friends!