By Louise Misiewicz
Relevant for tax year 2017/18.
Paying yourself a wage
There are several ways to get money out of a company in a tax efficient way
- Wages up to £8,164 provided you have no other form of employment income.
- £5,000 tax free dividends (will be £2,000 from 2018-19)
- Contributions towards your own personal pensions
£11,500 is the tax free personal allowance, but you will pay National Insurance (NI) if you paid yourself this amount from the limited company. National Insurance is not due if you reduce your wages to £8,164 per year.
This means that you need to pay yourself a wage of £680.33 per month to be tax and National Insurance efficient.
Please note that you will need to register as an employer if you pay yourself or anyone else above £113 per week. I am personally not sure why you need to register as you will not be paying national insurance or tax but it is a HMRC requirement.
Dividends from April 2017
Dividends can only be paid out of post tax profits or retained earnings (ie profits from previous years not taken from the business or used by the business) if they relate to your own limited company.
If your business has made a loss rather than profit in a year and has no retained earnings. There are no dividends able to be taken.
The first £5,000 dividends are tax free irrespective of how much money you earn. Any dividends in excess of £5,000 will be taxed as a basic rate tax payer at 7.5%. A basic rate tax payer is an individual whose total income is no greater than £45,000.
If you take dividends in excess of the £5,000 and are a high rate tax payer then you will pay 32.5% dividend tax or 38.1% dividend tax as an additional rate tax payer.
Download our property investment guide here
Don’t forget pension contributions
One of the up sides to having a limited company is the ability it has to make pension contributions on your behalf. In 2016 you could make say £40,000 pension contributions, provided you have sufficient income. If you do not have any taxable income then the maximum contributions you can make is £3,600. If you have taxable earnings then the maximum you can invest in any one tax year is £40,000. Without having an adverse tax effect.
Lets look at an example:
£100,000 profit in your limited company (after paying the £8,164 in wages)
£19,000 corporation tax based on todays rate of 19%
£81,000 cash left which you can take as £5,000 tax free dividends
However, let us look at the example whereby the company contributes £40,000 into your pension fund.
- £100,000 profit in the limited company
- (£40,000) less pension contribution
- £60,000 adjusted profit
- £11,400 tax based on 19% tax rate
- £48,600 cash left in the business which you can still take £5,000 tax free dividends.
The company can also invest in your spouse’s pension to get additional tax relief.
We discussed in another article how earning more than £110,000 can have negative consequences on your pension contribution annual allowances.
Other tax benefits of having a limited company
We have written other articles about the additional benefits of having a limited company. These may be read here:
- Childcare vouchers paid by your company
- Passing shares to your siblings to reduce IHT
- Key person (life) insurance paid by the limited company
- Creating freezer shares to minimise IHT liabilities
Why should I even have a limited company?
Based on the above you would have noticed the following:
– Paying 19% corporation tax (from April 2017)
– Paying a further 7.5% tax on the dividends (as a basic rate tax payer)
You may wonder why one would do this as it would mean you are technically paying 27.5% tax rather than 19% if you put your income in your self assessment. You are right!
The only time I would suggest that you use a limited company is when you are already a higher rate taxpayer. As an employee or business owner, or if you have vast amounts of property profits.
Example: Sarah is a higher rate taxpayer working for a blue chip company in London as a marketing director. Her salary is £40,000 and she is planning on investing in property.
Unfortunately, she will pay 40% tax on any property profits that she makes and for this reason, she may be better to use a limited company. Any profits that property makes will be held in the limited company rather than in her name. The corporation tax is of course 19% and will hopefully be dropped down to 17% by 2020.
If for example Sarah did want to take £20,000 from her limited company as a higher rate taxpayer then she would be taxed at 32.5% on £15,000. Remember she can take £5,000 dividends tax free irrespective of how much money she earns. This is on top of the corporation tax that has already been paid of 19%. This means that technically the £5,000 is taxed at 19% (corporation tax and no income tax). And the majority of £15,000 has been taxed at 51.5% compared to 40% if the income was in her own name rather than the company.
However, there are a few upsides to a limited company in this circumstance:
1 – Profits by 2020 will hopefully be 17% rather than 40% if the income was in Sarah’s name.
2 – If the property profits in the limited company were £100,000 and Sarah takes out £50,000 in dividends. The corporation tax by 2020 (17%) would be £17,000 (based on £100k profits). Of the £50,000 she will get £5,000 dividends tax free and pay 32.5% on £45,000
If Sarah had all the income in her own name then the profits would be subject to 20% as a basic rate tax payer, 40% as a high rate tax payer and 45% tax as an additional rate tax payer.
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