Contractor salary -what level of should I take? Here is a subject that is one of the most common things a person asks who is a contractor running their own company. You could take a low salary, a middle-level salary, or even a high-level salary. The choice is yours to decide on based on what you would like to do.
If you are married or have a partner you might also consider paying your spouse a salary. In addition, depending on what your spouse earns, it may also be an idea to consider making use of the transfer of the Marriage Allowance.
What to consider
Things to think about when you decide on your salary
When you look at my salary as a contractor, you will need to look at various factors. These would include being tax efficient and paying enough to justify your pension payments. It may even include paying a higher salary should you have your reasons for doing so.
What’s more, there are several things to think about here. Each contractor will have their personal preference when it comes to what they decide on as their level of salary.
If you do not have any other thoughts, such as setting a higher salary for pension or other reasons, then you might aim for a tax-efficient mix of salary and dividends. These are part of my handy tax tips for contractors and small business owners.
Scenario for your salary
If you take a salary above the NI threshold and take the rest of your earnings as dividends, this is tax-efficient for you.
In 2021/22, the tax-free personal allowance is £12,570. You can, however, earn as little as £9,564 per annum, and this will count as a year that qualifies for state pension purposes.
£9,564 per annum will equate to £797 per month, and as such, you may choose to pay yourself a salary at this level.
Indeed, this does assume, of course, that you will fall outside of the IR35 rules.
You could take a higher level of contractor salary, but a salary above £9,564 would incur:
- Employees NI of 12%; and
- Employer’s NI of 13.8%
- A salary above £12,570 would also incur income tax at 20%
What to consider
When you make pension payments, the general advice is your salary should be at least as much as your pension payments. Your pension adviser can let you know here. They can advise with regards to what salary level you need to be able to make your pension payments.
If you have worked at several different employers in the past and have various pension schemes, something that you may be interested in is pension consolidation.
Many contractors choose the most tax efficient option by taking a contractor salary just above the NI threshold. They will then take the rest of their earnings as dividends.
Please have a read of how you can maximise your income in 2020/21.
Link to Contractor Advice UK group on