Salary and Dividends for Freelance Contractors
Q. Do I need to take a fixed salary every month?
A. There is no hard and fast rule on this but it is probably in your own interest to withdraw a regular salary to meet your personal day-to-day outgoings.
Q. Once I have decided on a salary, how do I calculate how much I pay myself after tax?
A. We will run a payroll for your Company and will calculate all tax and national insurance on the salary you have decided to pay yourself, notifying you of the net salary due to be paid.
Q. Some people have told me they pay themselves a dividend. What are dividends?
A. Dividends are a way of paying the company profits to you, the shareholder.
Q. Can I take dividends from my company?
A. This will depend on your IR35 status, as dividends can only be paid where your contract falls outside the provisions of IR35. We will advise you on this at the start of your contract.
Q. Can I pay dividends every month?
A. As long as there is a company resolution declaring the dividend payable to the shareholder, and the dividend does not exceed the company’s retained profit, then there is nothing to stop you drawing against that dividend as often as you wish.
Q. How much tax is payable on dividends?
A. There are 3 rates of dividend tax – 10% (basic), 32.5% (for higher rate taxpayers), and 37.5% (for earnings over £150k p.a. from 6/4/2014). To calculate the tax payable, a 10% tax credit is added to your net dividend, so if you pay yourself a £1,000 net dividend, you are actually taxed on £1,111.
After taking into account this tax credit, there is no extra tax to pay if you are a basic rate taxpayer, and the effective dividend tax rate for higher rate taxpayers is 25% (up to earnings of £150,000) and 30.56% (earnings over £150,000). This is the approximate amount of income tax you should set aside.
Please note that from April 2016 the rules surrounding dividend taxation are changing significantly, and a separate dividend tax is being introduced. We will update this page and our net pay calculator to take account of the new rules, very shortly.
Q. Can I work out what my net pay would be?
A. Yes, we have a net pay calculator that you can download. This will enable you to see what your net pay is likely to be.