Tuesday, April 12th, 2022
This information is aimed at small business owners who are both shareholders and directors of the Limited Company, whose main income is from the Limited Company.
You pay corporation tax on the profits made by your Limited Company at a current rate of 19%. Any profits made after this tax are generally available for you to take from the company.
Any money you take from the company then has tax implications on you personally.
There are three main ways to take money from your Limited Company – Salary, Dividend & Pension Contributions:
- This involves taking the money as a wage and processing it through a payroll scheme.
- The most tax-efficient way to do this is to take a salary at the National Insurance secondary threshold – currently £9,100 per year.
- At this level of salary, there will be no Employers or Employee’s National Insurance to pay. If your personal allowance is not being used up by other income, then there will also be no PAYE to pay.
- The cost of the salary is a tax-deductible expense so you will save corporation tax of 19%.
- If your personal allowance is being used on other income, then you will pay PAYE on the salary at 20% (unless you are a higher rate taxpayer). It is still beneficial to take this salary as you will still be saving the corporation tax at 19%. Effectively you will be paying tax at 1% on your salary.
- Any salary taken over the £9,100 per year will pay Employees National Insurance @ 13.25% and Employers National Insurance @ 15.05% (but you may be entitled to employment allowance towards this cost if you have other employees). It, therefore, becomes less tax efficient to take salaries above this level.
- This involves paying money to yourself from the company as a dividend. This is then declared on your personal tax return as dividend income and is taxed as part of self-assessment.
- Dividend payments are not a tax-deductible expense and therefore you do not save 19% corporation tax. However, the rates of personal tax on dividend income are currently lower than on other forms of income.
- The most tax-efficient way to utilise dividends is to take a salary of £9,100 as mentioned above and then take the remaining profits as a dividend.
- There is an annual dividend allowance of £2,000 taxed at 0%. Any further dividend is taxed at 8.75% up to the basic rate band, 33.75% up to the higher rate band and 39.35% for additional rate income.
- It is important to note that dividends can only be paid if there are sufficient profits in the company. A dividend can not be taken if it would make the profit reserves of the company negative.
- Pension Contributions
- This involves the company making employer contributions into your pension.
- The payments are a tax-deductible expense and so will save 19% corporation tax.
- There is no limit as to how much a company can pay into the pension, but the amount should be justifiable as a reasonable remuneration for the work you do.
- It is also important that the pension payments are ‘wholly and exclusively for the purposes of the trade (for example, are other employees receiving comparable remuneration packages).
- We always recommend that you seek the advice of an Independent Financial Advisor regarding pension contributions.
Please get in touch with us and we will be happy to advise you on how to take your profits from your company in the most tax-efficient manner.