One question that comes up a lot with contractors is:
“What’s the best way to pay myself?”
The answer is often a mix of salary and dividends, organised in a specific way to maximise take-home pay whilst staying on the right side of HMRC rules.
Salary
Most contractors pay themselves a nominal salary at a level around the personal allowance (currently £12,570).
At this level you don’t pay Income Tax or National Insurance on the salary itself and you can also still receive state pension credits and other benefits.
Dividends
Dividends are extracted from profits after Corporation Tax has been paid, and are subject to the following rules:
– The first £500 of dividends are tax-free.
– Dividends are taxed at 8.75% (basic rate) and 33.75% (higher rate).
– Dividends are not subject to National Insurance.
– You need to have the correct paperwork in place — they need to be supported by dividend minutes and vouchers.
Making It More Efficient
- Spouse shareholder – by making your spouse a shareholder you can use their unused basic rate band and potentially reduce overall household tax.
- Build reserves – you don’t need to extract everything at once; it is often possible to leave profits in the company to give you more flexibility for future planning.
Our view
The small salary plus dividends approach is often one of the most tax-efficient ways of paying yourself as a contractor. But different things will be relevant depending on your exact income levels, household set up and long term plans.
📞 Interested in making sure you’re paying yourself in the most tax efficient way? Bright Ideas Accountancy specialises in helping contractors and freelancers maximise take-home pay and stay fully compliant. Give us a call to discuss your setup.
