How to pay yourself from your construction company

Construction company director reviewing his salary
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As the director of a construction business in a limited company structure, you naturally want to pay yourself a decent wage. You may choose a salary, dividends, or a combination of the two. It’s common for directors to pay themselves the most tax-efficient salary and top it up with dividends. Each approach has different tax obligations, both for you personally and for your business.

Many company directors find that the combination of a low salary and dividends is the most tax-efficient way to pay themselves. However, a dividend paid from a business that is not in profit can be risky, as it is classed as a director’s loan for which the director is personally liable.

If your construction firm is doing well, then taking dividends to top up your salary is generally a good idea. But in times of economic uncertainty, or if your firm is struggling, then you could find yourself on a dangerous path. Read on for Empowered by Cloud’s guide on the best way to pay yourself as a company director in 2024/25.

For tailored advice on how to pay yourself and the various tax implications, then please make an enquiry.

What are the different ways of paying yourself as a limited company owner?

First, let’s take a look at the main methods of remunerating yourself as a construction business owner and the various tax implications. In this article, we’ll concentrate on salary versus dividends or both.

Bear in mind that there are other ways to compensate yourself, including claiming business expenses or through company pension contributions, but we’ll just stick with the basics for now.

#1 Salary

Salary payments are usually made on a monthly basis from the business to the employee (in this case, you). To pay yourself in this way, you must register the business as an employer, enrol in PAYE and establish a payroll function.

Salary tax treatment – as an employee

Salary is liable for National Insurance Contributions (NIC) and Income Tax on all earnings above your tax-free personal allowance (currently £12,570). The higher your salary, the more income tax you will pay (the income tax rate bands for 2024/25 can be found here).

As a business owner that takes a salary, your tax and NICs are calculated and collected by the PAYE system as part of the company’s payroll function, so there is no need to submit a self-assessment tax return to HMRC (unless you also take a dividend payment or received any other income that has not been taxed at source).

Salary tax treatment – as an employer

Salary is classed as a business expense and, therefore, can be deducted from the company profits before tax, which means a reduction in the company’s Corporation Tax bill.

Employers National Insurance Contribution (NIC) will be due on all earnings above £9,100 at a rate of 13.8% in 2024/25, this will be paid to HMRC along with any employee’s Income Tax and NIC monthly or quarterly.

The pros and cons of paying yourself a salary

Pros

  • You will still receive a wage if your company is not making money.
  • You’ll be able to claim National Insurance benefits, such as paid maternity leave and state pension entitlement.
  • Your firm’s Corporation Tax bill will be reduced.
  • If a salary is your sole channel of income, you’ll cut down on your personal admin.

Cons

  • Both you and your firm are liable for NI payments.
  • The rate of income tax is higher than dividend tax.

#2 Dividends

Dividends are a percentage of the company’s profit (after Corporation Tax ) that are distributed to shareholders, usually on a quarterly or annual basis. As a company director, you must also be a shareholder to take dividends.

To take a dividend payment, a minuted meeting of directors must be held to ‘declare’ the dividend (even if you are the sole shareholder and you’re sat on your tod!). Then a dividend voucher must be drawn up with the date, your name and the amount, which is kept on record and as proof should HMRC require it.

It’s important that the amount of dividends you pay yourself is proportionate to the company profits. If your company is NOT making a profit, then any cash you withdraw will be classed as a director’s loan rather than a dividend, for which you are personally liable.

Dividends tax treatment – as an employee

Dividends do not incur National Insurance but are subject to Dividend Tax, the rate of which is based on your income tax band. Dividend Tax has increased in 2024, but the basic rate is still only 8.75%, (the dividend tax rate bands for 2024/25 can be found here)

If you take a dividend that exceeds your tax-free personal allowance, then you must submit a self-assessment tax return to HMRC. The dividend allowance from 2024 is reduced to £500. Considering that the allowance was £5,000 a few years ago, taking a dividend is not nearly as valuable as it once was.

Dividends tax treatment – as an employer

Dividends are paid from a company’s profit after Corporation Tax, as opposed to salaries which are classed as a business expense and can be used to reduce the company’s Corporation Tax bill.

Pros and cons of paying yourself in dividends

Pros

  • The biggest pro of taking a dividend is the reduced amount of tax you have to pay compared to Income Tax on a salary.
  • There are no NICs on dividends.
  • You are entitled to a tax-free dividend allowance on top of your Personal Allowance.

Cons

  • You can only take a dividend if your company is in profit after tax. Otherwise, it’s treated as a repayable director’s loan. If it is above £10,000, it can be a benefit in kind if interest is not paid. Any loan unpaid 9 months after the year-end is subject to S455 tax. So withdrawing cash in this way comes with personal financial risk.
  • Dividend payments won’t reduce your company tax bill.

#3 Salary plus dividends

As a limited company director, you may choose to pay yourself both a salary and dividends to maximise tax efficiency. Whether it is beneficial depends on what your personal financial goals are and your company’s profitability.

Pros and cons?

It’s not just as simple as the pros outweighing the cons in this instance, or vice versa. It very much depends on your personal income goals versus your company’s profitability. The key is to find the sweet spot and optimise both payments for personal and company gain.

It’s a smart move to consult a professional accountant before making a decision on exactly how to pay yourself as a construction firm director. Empowered by Cloud helps lots of directors in your position to make accurate decisions on the method of payment that is most beneficial. If you’re feeling unsure, don’t bury your head in the sand; reach out to us for help.

Dividend payments – a word of caution

The salary and dividends combo may seem like a tax efficient win-win, but only if your construction business turns a profit. It’s a very expensive way of paying yourself if things aren’t going so well and also puts you at personal risk – the very thing you started a limited company to avoid.

At Empowered by Cloud, we see many business owners take money from the business without actually voting the dividend after checking the company’s financial position, but this is inadvisable in times of financial uncertainty.

By withdrawing from a loss-making business, you are classed as taking a director’s loan, which you are responsible for paying back. If you can’t repay it within 9 months after company year-end, then it is subject to the Additional Rate of tax under S455. Ouch.

If your company forecasts are reasonable and you are suffering a financial blip, it may seem like a reasonable risk to take. However, to play devil’s advocate for a second, let’s say the construction industry encounters unforeseen circumstances (pandemic, Brexit, anyone..?). Your firm could be in real trouble and may even go into liquidation.

The past year you worked on a low salary plus high dividend (that wasn’t really a dividend due to lack of reserves) has just become really expensive as you are personally liable to pay back that money to the company.

And you also worked for a full year for almost free.

Imagine losing the mechanism for earning, i.e. the company, and also having to repay what you owe to that failing company. Double ouch.

How to pay yourself during economic uncertainty

If your business is going through some uncertainty, then a low salary might not be the best strategy. It might be better to pay more tax on a decent salary and keep a separate distinction between you and the company.

Get advice from Empowered by Cloud

If the complexities of paying yourself as a limited company director are giving you a headache, then you’re not alone. What with the various tax rules, it’s a head-scratcher, for sure.

If your accounts are in a mess, then it just adds to the confusion. How can you make a decision if you don’t have clear sight of your profit/loss or cash flow? You’re shooting in the dark and run the risk of making a costly mistake for you and your business.

That’s why it literally pays to consult an accountant with expertise in the construction industry and the complexities of tax law. Empowered by Cloud is just that. We can help you to make an informed decision about whether it’s better for you to pay yourself a salary or dividends, depending on your individual circumstances.

If you’re ready to become financially empowered, then please get in touch.

Picture of Laura Taylor

Laura Taylor

Laura made the bold choice to start Empowered by Cloud in 2018 on her own, with only £200 funding. Her motivation for helping businesses become more financially aware has now established her as a leader in cloud accountancy. She was recognised as one of LinkedIn’s Top Voices of 2020.

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