Quick Menu
Setting a Salary
As a freelance contractor the Income you take through a Limited Company depends on the IR35 status of contracts you’re engaged upon. If the:- Limited Company is engaged upon a contract outside IR35 you can set a low salary (normally between £12-24k per annum), claim substantial business expenses and take dividends from the company, which avoid large national insurance contributions.
- Limited Company is engaged upon a contract Inside IR35 you have to take all contract income in the form of salary (which attracts income tax and class 1 Employer’s and Employee’s national insurance). You can also claim 5% of company revenue as administration expenses plus site based expenses such as travel to and from the site
If you find that you’re working on more contracts inside IR35 than outside IR35 you should consider using an umbrella company solution.
Why set a Salary?
If you’re working on contracts outside IR35 you should still set a monthly salary as taking salaried income helps to minimise your tax burden and maintains credits towards the state pension scheme. Although legally there is no requirement for a Director of a company to take salaried income (non-directors are subject to minimum wage laws and must take at least the minimum wage as salary), failure to take a salary may attract unwanted attention.The level of salary you pay yourself is completely up to you. £12k is a common annual salary taken by a freelance contractor; some wish to be more aggressive and reduce this still further. However, as mentioned previously this may attract unwanted attention and make it even harder to secure a personal loan or mortgage. The level of salary to expenses also appears more disproportionate with an aggressively low salary.
Contractors normally set Gross salaries around:
- £12,000 per annum (£1,000 pcm), or
- £7,455 per annum (£621.25 pcm)
When setting a salary it is often wise to ensure that you set a salary at least above the threshold for National Insurance Contributions as paying a very small amount of National Insurance means you continue to receive credits towards state pension. It is also a good idea to ensure that you’re paid at least above National Minimum Wage (NMW).
