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What level of contractor salary (UK) should you take when you run your own limited company in the United Kingdom? It is important to note that when you are in business for yourself, you can decide on your level of director salary from your contractor earnings. This is not the case when you work through an umbrella company or are employed full-time. Overall, maximising your overall UK contractor take-home pay is key, however taking a contractor tax-efficient salary in terms of PAYE is also a key consideration. Therefore, let us now investigate how to pay yourself as an independent contractor.
When deciding on how to pay yourself as a contractor, a director’s tax-efficient salary is something to consider as part of your overall tax planning. As a result, this will help you maximise your contractor take-home pay. Therefore, many UK limited company contractors and independent consultants who work in the IT field (and other industries) will need to decide on the level of IT contractor salary that their company pays them as part of their overall contractor take-home pay. Furthermore, the salary of a contractor can also depend on other factors.
The subject of how to get paid as a contractor, in terms of contracting pay and dividends, this is one of the most common things a UK contractor needs to consider when running their own company. Indeed, you could take a low salary, a middle-level salary, or even a high-level salary, and the choice is yours. Therefore, you can consider what is best for you in terms of a contractor tax-efficient salary and ask your accountant to process this for you going forward.
Other initial considerations -independent contractor salary
How much do you get taxed as a contractor? Notably, your chosen level of limited company salary will determine how much PAYE and National Insurance your company pays to HMRC. As a result, many UK contractors will choose to take a contractor tax-efficient salary.
The other main tax for your company is Corporation Tax and this is payable on company profits which are generated from your contract income. Any salaries that your company pays are included as an expense when working out the company profit.
Besides your own contractor take-home salary, if you are married or have a partner, you might consider paying your spouse a salary. You can do this if they do some work for your contractor limited company. As a result, this will help save company tax and also give your spouse a wage.
Furthermore, depending on what your spouse earns, it may also be an idea to consider using the transfer of the UK Marriage Allowance.
When you consider can I pay myself as a contractor from my own company, the salary cost will be paid out of your company profits. Please note, your company profits are calculated by deducting all business expenses from the company income. Therefore, there should be enough remaining to pay you your chosen contractor monthly salary after working this out.
Limited company contractor salary -what to consider
How much should I pay myself as a director?
There is no minimum wage requirement when it comes to your limited company director salary. That is unless you have a contract of employment with your UK company.
When you consider how much to pay yourself as a director, you must consider various factors. Most importantly, these will include being tax-efficient and ensuring that you take enough contractor pay to justify any pension contributions. This may even involve paying a higher salary, should you have reasons for doing so.
Each contractor and independent consultant will have their personal preference regarding what they decide on as their level of contractor salary. When you are being paid as a contractor from your own company it is your choice what your company pays you.
If you do not have any reasons for taking a higher level of contractor remuneration for pension or other reasons, you might aim for a tax-efficient mix of independent contractor pay and dividends. Notably, these are part of our handy guide that covers tax tips for contractors and small business owners.
Contractor take-home salary -the options available
As mentioned, when you run your own UK limited company, you can choose your level of contractor wage. This will be part of your overall contractor take-home pay.
For example, you could take a director salary above the NI threshold (£823 per month) and take the rest of your earnings as dividends. As a result, this is tax-efficient for you.
In the tax year 2022/23, the tax-free personal allowance is £12,570.
Therefore, you could take a higher salary than £823 if you so wish.
As part of your contractor pay, your company may need to pay over PAYE/NIC. If it does, the PAYE/NIC are part of your contractor limited company taxes.
The salary of a contractor
UK NI thresholds
The National Insurance (NI) thresholds are as follows:
- Employers are required to start deducting NICs on earnings above the lower earnings limit (LEL). In 2022/23, this is set at £533 per month or £6,396 per annum. At this level, benefits will accrue for the employee’s state pension.
- The primary threshold (PT) for employee contributions is set at £823 per month or £9,880 per annum for 2022/23.
- The upper earnings limit is set at £4,189 per month or £50,270 per year for 2022/23.
- The secondary threshold (applicable to employers) is set at £758 per month or £9,100 per year. Please note, there is no upper earnings limit for employer NIC liabilities.
UK NI rates
The rates for National Insurance are:
- 12% employee NI for income between the primary threshold and the upper earnings limit.
- 2% employee NI for income over the upper earnings limit.
- 8% employer NI for income over the lower earnings limit for NIC Classes 1, 1A, and 1B.
The above NI rates were all increased by 1.25% from 2022/23, however the government later reverted on these increases.
UK income tax rates
The income tax rates, personal allowance and tax bands can change year on year. At present, a contractor salary above the current personal allowance of £12,570 will incur income tax at 20%.
The current UK income tax rates are:
|Personal allowance||Basic rate tax||Higher rate tax||Additional rate tax|
Contractor salary suggestion
Due to the increase in NI rates and NI bands in the tax year 2022/23, a director’s optimum salary is now £992.33. As a result of this level of contractor salary per month, your company will make more Corporation Tax savings even though there is employer’s NI payable above £533 per month. Please note, this level of contractor pay is optimal if you have no other sources of income that will use up your personal allowance. Such other sources of income would include rental profits, self-employment profits, pension income, etc. Therefore, if you have other income, £823 will be the optimal contractor take-home salary.
Indeed, the above mentioned salary of a contractor level does assume, of course, that you will fall outside of the IR35 rules. Key to note, the rules came into force in the public sector on 6 April 2017 and then in the private sector on 6 April 2021. Consequently, the IR35 reform effectively means the duty of determining the IR35 status of a contractor’s work falls on the service provider rather than the contractor. At the moment, this only applies to large and medium companies.
Tax calculators online can help you work out the tax bills (PAYE tax and NI) on your chosen salary level. This website aims to bring you a calculator in the future.
An example of a contractor tax-efficient salary and being tax-efficient as a whole
Many IT professionals, or other independent consultants, may take an optimum director’s salary (2022/23) of £992.33 per month. Secondly, if you are starting contracting for the first time, you could set your contractor starting salary at this level. In addition, if your business is generating enough profits through the company, you could decide to take the following as annual earnings from your company:
|IT contractor salary||12 x £992.33||11,908.00|
|Dividend||12 x £3,190||38,280.00|
An income of £50,188 (assuming that the contractor has no other substantial income from other sources) would leave the individual under the higher rates tax level (£50,270) in 2022/23. Key to note, this level and mix of income are tax-efficient. As a result, you will both maximise your basic rate tax band and not incur any personal higher rates tax.
Contractor salary -pension considerations
When you make pension payments, the general advice is the level of salary of a contractor should be at least as much as your pension payments. Your pension adviser can let you know here. Notably, they can advise about what contractor pay level you need to be able to make your pension payments.
If your company makes employer pension contributions, there is no legal requirement for your salary to be as much as these. However, this is unlike when you make such contributions yourself. When you do so, your salary needs to be at least as much as such contributions.
Let’s assume you wanted to pay £25K into your pension personally in a given tax year. To do this, your salary would also need to be at least £25K. Comparatively, if you paid the £25K into a pension through your company, there would be no requirement to set your salary at £25K.
You may have worked at several different employers in the past and have various pension schemes. As a result of this, something that you may be interested in is pension consolidation.
Many contractors choose the most tax-efficient option by taking a director salary just above the NI threshold. As a result of their contractor tax-efficient salary, they can then decide to take the rest of their earnings from their company as dividends. As a result, this is the most tax-efficient combination of contractor take-home pay.
Finally, another helpful guide on taking income from your company is the most tax-efficient way to pay yourself. Please note, this extrapolates on the above and gives an overall view on how to be tax-efficient when you run your own company.
Link to Contractor Advice UK group on
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