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Introduction
What level of self-employed contractor salary (UK) should you take when you run your own limited company in the UK? It’s important to note when you’re becoming a contractor (UK) or have been contracting director you are in control of your own finances. Basically, when you’re in business for yourself and plan to pay yourself a salary, you can decide on your pay level. Indeed, you can choose your own level of contractor director salary (UK limited company) and overall income. Therefore, when you’re paying yourself from a limited company what should you consider in terms of your director salary from your freelance contractor earnings? When you run your own business, it’s key to maximise your overall UK contractor take-home pay. However, taking a contractor tax-efficient salary in terms of PAYE for contractors is also a key consideration. Therefore, let’s investigate how to pay yourself as an independent contractor.
When you decide on how to pay yourself as a contractor and director, the most tax-efficient salary (UK) is something to consider as part of your overall UK contractor tax planning. As a result, this will help you maximise your contractor take-home pay (UK). 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 (UK). As part of their IT contracting work, the salary their company pays is within their overall IT contractor take-home pay. Indeed, the level of contractor salaries that they choose will affect their overall IT contractor tax bills.
Initial thoughts
First thoughts
The subject of how do contractors get paid, in terms of contracting pay is one of the most common things a UK contractor needs to consider when they run their own company. Indeed, when we look at how contractors get paid and what can you pay yourself as an independent contractor what are the options? Basically, your chosen contractor level of company director salary (limited company) could be a low contractor consultant salary. Alternatively, you could take a middle-level independent consultant salary, or the highest salary available salary from your contracting income. Basically, the choice is yours. Therefore, when you calculate contractor salary, you can consider what’s best for you. If you choose an IT contractor tax-efficient salary, this is ideal going forward. To sum up, you can ask your accountant to process this in future.
The salary of a contractor can depend on other factors when you decide on your overall contractor income. In this article, we’ll look at how do I get paid as a contractor. In addition, we’ll consider what should be your minimum director salary (UK) and the UK contractor salary threshold. We’ll also investigate the optimum director’s salary 2023/24 and consider the various factors around this.
When you are a `self-employed contractor’ and you run your own company, you are not `self-employed’ per se. The correct way to view yourself is as a director and employee of your own company.
Some common questions
There will be many common questions from contractors with regard to salary when they first start up their own company. Some examples of such questions will include:
- Do I have to pay myself a salary as director?
- How to do payroll yourself (UK).
- How to pay yourself from a limited company (UK).
- How to pay yourself a salary from a limited company.
- How to pay yourself as a director.
- What should my salary be (UK)?
- Should I pay myself in dividends or salary?
Therefore, in this guide we’ll take a good look at how do you pay yourself as a limited company owner. Indeed, when you have a limited company, paying yourself as a director is a key question that needs careful consideration.
What to consider first regarding your independent contractor salary
How much do you get taxed as a contractor on your UK contractor take-home pay? Basically, when you choose your director pay level, this needs careful consideration. Your chosen level of limited company salary from your contracting work determines how much contractor PAYE and NI you pay. As a result, many UK contractors will choose to take a contractor tax-efficient salary.
The other main contractor tax (UK) for your company is Corporation Tax. Basically, this is payable on company profits which you generate from your contract income. When you’re paying yourself from a limited company this will reduce tax. Indeed, any salaries which your company will pay are an expense when you work out the company profit.
Besides your own contractor take-home salary (UK), 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 making use of the transfer of the UK Marriage Allowance.
Your company’s profits
When you consider can I pay myself as a contractor from my own company, the contract consultant salary cost will be paid out of your company profits. Basically, when you calculate your company profits you deduct all business expenses from your company income. Therefore, there should be enough remaining to pay you your chosen contractor monthly salary after working this out.
What to consider for your limited company contractor salary
How much should I pay myself as a director?
There is no contractor minimum wage requirement when it comes to your limited company director salary (UK). That is unless you have a contract of employment with your UK company.
When you consider how much to pay yourself as a director as your contracting salary, 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 taking higher contract take-home pay in terms of company director 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 private contractor salary. When you are being paid as a contractor from your own company, it is your choice what your company pays you in respect of take home pay (independent contractor).
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. Basically, these are part of our handy guide that covers tax tips for contractors and small business owners.
The options available for your contractor take-home salary
As we mention earlier, when running your own UK limited company, you can choose your level of contractor wage. Basically, this will be part of your overall contractor limited company take-home pay. Therefore, what is the optimum salary for directors 2023/24?
Through your own UK company, you could take a director salary above the NI threshold (£1,047.50 per month) and take the rest of your take-home pay (limited company) as dividends. As a result, this level of contractor salary is tax-efficient for you. In the tax year 2023/24, the tax-free personal allowance is £12,570. In addition, you could also take a higher contracting salary than £1,047.50 if you so wish.
If you work in IT, as part of your IT contractor pay, your company may need to pay over PAYE/NIC. If it does, the PAYE/NIC on your IT contractor payroll (UK) are part of your contractor limited company taxes.
The salary of a contractor in 2023/24
UK NI thresholds (contractor salary threshold 2023/24)
The contractor National Insurance (NI) thresholds in 2023/24 which apply to a contractor’s salary are as follows:
- Employers will deduct NICs on earnings above the lower earnings limit (LEL). In 2023/24, 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 £1,048 per month or £12,576 per annum.
- The upper earnings limit is set at £4,189 per month or £50,270 per year.
- The secondary threshold (applicable to employers) is set at £758 per month or £9,100 per year. However, there is no upper earnings limit for employer NIC liabilities.
UK NI rates
The rates for National Insurance in 2023/24 for your contract salary are as follows:
- 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% during 2022/23, however the government later reverted on these increases. As a result, the NI rates in 2022/23 were a mixture of the two rates i.e., the employer’s NI mixed rate was 14.53%.
UK income tax rates
The UK contractor 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%. Therefore, the current UK income tax rates are:
| Personal allowance | Basic rate tax | Higher rate tax | Additional rate tax | |
|---|---|---|---|---|
| 20% | 40% | 45% | ||
| 2023/24 | £12,570 | £0-£37,700 | £37,701-£125,140 | £125,141 and above |
Contractor salary suggestion
In the tax year 2023/24, a director’s optimum salary is now £1,047.50. This will equate to a contractor annual salary of £12,570. Indeed, this could be seen as the best way to pay independent contractors (UK) in terms of tax efficiency. What’s more, many IT contractors and contractors in other industries will choose this level of annual salary. As a result of this level of contractor salary per month, your company will make Corporation Tax (CT) at either 19% or 25%, even though you start to accrue state pension benefits above £533 per month.
Indeed, £1,047.50 per month private contractor pay is the optimal director salary 2023/24 if you have no other sources of income that will use up your personal allowance. In addition, it will help lower the tax rate for independent contractor purposes. Other sources of income would include rental profits, self-employment profits, pension income, etc. Therefore, if you have other income, either £533 up to £758 per month will be the optimal contractor take-home salary. However, to ensure your NI contributions count as a `qualifying year’ for state pension purposes, you need to pay yourself a UK contracting salary of £533 or more for the full twelve months of the tax year.
If your company is not trading at the moment and is therefore not paying Corporation Tax, you should also consider a lower monthly contractor salary, such as the £533 or £758 suggestion above.
Further thoughts on salary level suggestion
Indeed, the above-mentioned level of salary for a contractor does assume, of course, that you will fall outside of the IR35 rules. Basically, 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.
Other considerations
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 (2023/24) of £1,047.50 per month. Secondly, if you are starting contracting for the first time, you could set your contractor starting salary at this level of optimal salary for directors 2023/24. 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 £1,047.50 | 12,570.00 |
|---|---|---|
| Dividend | 12 x £3,141 | 37,692.00 |
| 50,262.00 |
An income of £50,262 (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 2023/24. Indeed, 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. The independent contractor taxes (UK) in 2023/24 on this would be the dividends of £37,692 less the annual dividend allowance of £1,000, giving taxable dividends of £36,692. As a result, basic rate tax on this at 8.75% would equate to a personal tax bill of £3,210.55.
As we mention earlier, if your company is not currently paying CT, you should consider a monthly salary of £758 instead.
Pension considerations and your contractor salary
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. Basically, 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 contractor salary to be as much as these pension contributions. 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 would like to pay £25K into your pension personally in a given tax year. To do this, your contractor wages 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 had employment at several different employers in the past and as a result, have various pension schemes. As a result of this, something that may interest you is pension consolidation.
Final thoughts
We consider in this guide how to pay yourself the optimum director’s salary in 2023/24. Indeed, your salary is part of your overall ltd company take-home pay. Basically, when you’re a contractor and paying yourself from a limited company, the most tax-efficient option is to take a director salary just above the NI threshold. As a result of your contractor tax-efficient salary, you have the option to take the rest of your earnings as dividends. Indeed, this is the most tax-efficient contractor salary and overall 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. Indeed, this extrapolates on this article. Moreover, it 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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