Contractors: Paying Yourself

At Square Mile Accounting, we’ll help you put together the most tax efficient ways of paying yourself, to ensure maximum take home pay. We usually recommend a balance of:

  • a low salary, equal to minimum wage levels, and;
  • the rest of your income in the form of dividends


Once your salary level has been decided your accountant can help you set up a payroll and calculate the amount that should be allocated to HMRC for tax and National Insurance, as well as the net amount you can withdraw for your salary.


Dividends are a distribution of your company profits and do not affect the amount of corporation tax payable. Provided you are trading profitably and funds are available, you may take dividends at any time during the financial year. It is entirely up to you when and how much you take. All you will need to do is complete a dividend voucher, also known as a declaration form which, quite simply, is an official receipt. Dividends are paid in proportion to your company’s’ shareholding. It can be gainful to allocate share(s) to your spouse if he/she is a lower/basic rate tax payer.

Dividends for multiple shareholders

Dividends taken need to represent the level of work that shareholder does. If you have two shareholders both with 50% shares, but only one of these is contracting through the company,

HMRC will question that person is doing to justify that amount of shares.

Managing surplus cash and paying less tax

Rather than your extra cash gaining low interest in the bank, making sure that your money works as hard as possible is essential. Pension fund, dividends, ISA, stocks and shares in long term companies, real estate – are all options but your current situation, future commitments and tax position are deciding factors. It is best to plan around this with your accountant to ensure you’ve considered all available alternatives to maximise your tax position.

Directors’ loan accounts and borrowing money

As a contractor, you are fully entitled to take a loan from your limited company.  A director’s loan is classified as any monies you withdraw from your company that are not in respect of salary, dividends or business expenses.

There are strict rules around loans made to a director, and a tax charge will apply if the loan is not repaid within certain timescales. According to HMRC, a director’s loan must be repaid within nine months and one day of the company’s year-end, and any amount that is outstanding after this date, is subject to corporation tax at a rate of 25%. From a personal tax perspective, the maximum amount you can borrow before incurring any income tax liability is £10,000. Once a director’s loan rises above this threshold, it is classed as a ‘benefit in kind’ and becomes subject to income tax. This charge can be eliminated by charging interest on the loan – the rate for 2015/16 being 3%. In terms of repaying the loan, you can simply transfer money back into the company bank account, or credit the director’s loan account with a salary or dividend payment.

Remember, these are just some suggestions.  Get in touch with us for professional advice from your own online, personal chartered accountant. We’re happy to provide answers to any questions you have!

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