A popular tax saving income extraction strategy is to pay yourself, in your capacity as the director and shareholder of the limited company, a low salary from the company and then to pay dividends on top of this. This still remains the most tax efficient method of releasing income and in indeed paying yourself from your limited company. The blog post How Much to Pay from Limited Company explains this option in more detail and we won’t repeat this again here. Instead we will focus on what this strategy means for graduates who have a student loan to repay.
Salary and dividend payments
The above strategy to pay yourself from your limited company is a great way to save tax due to the savings in employee and employer national insurance payments. If you were to pay yourself a full salary via PAYE you will pay substantially more in income tax and NI payments when compared to paying yourself a low salary and then taking dividend income on top of this. The new dividend tax does increase the tax take associated with this slightly but do not overlook this option as it remains the best option for the vast majority of limited company owners.
What about my student loan?
There seems to be a misconception amongst a number of people that student loan repayments will not be due on salary income below the student repayment threshold. This is only partly true. Yes, if you have a low salary and no other income then you are unlikely to need to make any repayments towards your student loan balance. However, dividends are in fact counted as income when you are assessed against the student loan repayment threshold. This means that if your combined income (salary plus dividends received) exceeds the repayment threshold you will need to make repayments towards your student loan.
Always factor in your student loan when making decisions about extracting income from a limited company to avoid any surprises when you lodge your Self Assessment Tax Return.
Is this still a viable strategy for paying myself?
Yes, the above strategy for paying yourself from your limited company is still a low tax option for anyone with a student loan. The fact that you have a student loan doesn’t change the strategy per se but it does mean that you need to keep aside some cash to pay the student loan repayment sum after lodging your self assessment tax return. The HMRC tables found here will give you an idea of how much cash to save each month.
Take a look at the blog post linked to within the first paragraph to read more information on how to execute this income strategy during the 2016/17 tax year.