The most efficient way to pay yourself as a Director for an e-commerce business

Andrea Piacquadio
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If you have chosen to incorporate your e-commerce business, you may be puzzled by the best way to pay yourself. Should you use a salary, dividends, or a combination of the two? Let’s look at the most efficient way to pay yourself as a Director.

There are three main ways to receive remuneration from an incorporated e-commerce business. You can set a salaried amount, payable monthly, receive dividends when the company is financially sound enough to distribute them or use a combination of the two.

 

Salary cons

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Salaries have many upsides, but the biggest downside is the time for payroll processing. You can outsource your payroll if you don’t feel like taking on the work yourself. Additionally, if you are above the basic tax bracket, salaries can be an inefficient way to be paid, incurring a more substantial tax bill.

If you have other income, you will want to discuss your position with an e-commerce accountant before committing to a salary.

Salary pros

If you have no other earnings, a salary of £736.67 per month (£8,840 per annum) is the 2021/22 secondary earning limit for National Insurance. A salary of this amount won’t require you to pay employee’s or employer’s NI and will be tax-free. In addition, the salary is tax-deductible for the business, providing a saving of around £1,700 in Corporation Tax each year.

It’s vital to nurture your future, and a salary at this level will count towards your State pension qualifying years. If you decide not to be paid this amount, you should opt for voluntary contributions to ensure your pension is protected.

 

Dividend cons

Dividends must be paid from profit and retained earnings, so if your e-commerce business isn’t making a significant profit, you may end up with less than you had hoped for. The annual dividend allowance is only £2,000, after which you will have to pay taxes.

 

Dividend pros

Once you exceed your dividend allowance, you will only pay 7.5% tax if you are on a basic tax rate, or 32.5% if you are on a higher tax rate.

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The most efficient way to pay yourself as a Director

One of the main reasons why dividends remain cheaper than salary for most taxpayers is due to the amount that is subject to income tax rates, which is around 25% less than for salary.

The most tax-efficient way to pay yourself from your e-commerce business is to use up your tax-free salary allowance, followed by your dividend allowance. Once both have been exhausted, you will pay the least amount of tax through dividends although, there are additional advantages to paying up to the basic rate band in salaried income.

 

A word of warning

Make sure you leave sufficient cash in your business; don’t strip it dry through dividends. Use the cash flow features in Xero to predict your cash flow needs in the coming months and act conservatively. We always recommend discussing your dividend amounts with your accountant.

Can a director use company funds for personal use?

Essentially a director can use company money for personal use as it is not illegal to do so. However, it is frowned upon and is certainly not good business practice.

Of course, as a director of a company, you are free to withdraw money from your business account for a wide range of purposes whenever you like, however, it is always best to keep a record of spending and repay any funds as quickly as possible.

 

What else should you consider?

When considering the most efficient way to pay yourself as a director, you should also consider cash flow. For example, PAYE is payable the following month after the salary payment is made whereas corporation tax and tax on dividends are collected much later.

Whatever you decide to do, you should always consider the impact it will have on your business landscape.

Next steps

If you would like to discuss the most tax-efficient way to pay yourself from your e-commerce business or anything else related to e-commerce accounting, we would love to chat with you. Get in touch with the team and let’s grow your e-commerce business to its true potential.

After all for any eCommerce business, it’s important to stay on top of your accounting. The best way to do this is by seeking the advice of an experienced, specialist eCommerce accountant who will have the expertise to help.

Get in touch with Unicorn Accounting today!

The best time to act is now.

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