Many of our clients are director shareholders in their own limited company and one of the most common issues they ask us here at James Nicol Limited is the best way to take money out of their business without incurring an unwanted tax bill along the way.
The first way to do this is to take a director’s salary. For 2018/19 the personal allowance for individuals is £11,850, meaning you can earn this much without paying tax. Once above that level (in Scotland) you pay 19% up to £13,850, 20% from there up to £24,000 and £21% from there up to £43,430. Your salary reduces your company profits and so by taking a salary of £11,850 you would be reducing your company tax bill by £2,251.50 while only incurring National Insurance deductions of £411.12, a net saving of £1840.38.
Once you begin going above £11,850 it becomes inefficient to continue extracting funds only via salary as both tax and national insurance contributions become payable.
It is then time to look at dividends. Unfortunately the government have recently reduced the ‘dividend allowance’ from £5,000pa to £2,000pa. This means that you can withdraw dividends of £2,000 without attracting any additional tax. Where the company is owned equally by husband and wife for example this would allow a total of £4,000 to be withdrawn without additional tax.
Dividends however do not reduce your corporation tax and so it is important to factor in the 19% that will remain payable (this amount would be payable even if you did not withdraw these funds from the business).
Once above the £2,000 dividend tax basic-rate taxpayers will begin to pay at 7.5%. Higher-rate taxpayers are taxed at 32.5%. Additional rate taxpayers are taxed at 38.1%. Often it can be important to consider the timing of your dividend withdrawals, particularly around the tax year end, as this could have a large impact on how much tax you have to pay and when.
There are other options available such as company pension contributions which will reduce your tax bill while increasing your pension pot. There are rules and regulations around doing this however and so you must take proper advice before doing so. Another option, if applicable, would be renting commercial property used by the business to your limited company, although this is unlikely to apply in most cases.
While the taxation benefits of a limited company have been slightly reduced in recent years it is still more efficient than being a sole trader (if you do it properly). Tax planning and professional advice tailored to your individual circumstances are however crucial if you are to minimise your tax bill while maximising the money you take home.
If you have any questions please don’t hesitate to get in touch and one of our friendly members of staff will be delighted to help.