Ways to get money out of a company
There are several ways to get money out of a company in a tax efficient way
- Wages up to £8,060 provided you have no other form of employment income.
- £5,000 tax free dividends
- Contributions towards your own personal pensions
Paying a wage
£11,000 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 £8,060 per year.
This means that you need to pay yourself a wage of £671.66 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 £112 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 2016
You may wish to take more money than the above out of the limited company and you can do this by paying yourself dividends. Please note that you can only pay yourself a dividend if you are making a profit.
For example, if your limited company makes £10,000 in profit then you can only pay yourself a dividend equal to or less than £10,000.
The basic rate of tax is limited to £32,000, plus your £11,000 personal allowance. You will therefore be a basic rate taxpayer until you start to earn more than £43,000. At that point your tax will increase from 20% to 40%.
The difference between £43,000 and the £8,060 wages is £34,940 This is your dividends that can be taken as follows in a tax efficient manner:
– Up to £5,000 @ 0% tax = £0 tax
– £29,940 @ 7.5% tax = £2,245.50
If you do pay yourself over the suggested levels then you will pay an additional 32.5%.
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
£20,000 corporation tax based on todays rate of 20%
£80,000 cash left which you can take as £5,000 tax free dividends
However lets 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
- £12,000 tax based on 20% tax rate
- £48,000 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.
Process to take advantage of this strategy
1 – Tom has paid himself a wage of £8,060 as outlined above
2 – He has property profits of £20,000. He knows that the basic rate tax limit is £43,000 less the £20,000 property profits and less the £8,060 wages. He therefore decides to pay himself dividends of £14,940. Remember the first £5,000 is tax free.
Why should I even have a limited company?
Based on the above you would have noticed the following:
– Paying 20% corporation tax
– Paying a further 7.5% tax on the dividends
You may wonder why one would do this as it would mean you are technically paying 27.5% tax rather than 20% 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 20% and will 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 20%. This means that technically the £20,000 has been taxed at 52.5% compared to being taxed at 40% if the income was in her own name rather than the company.
In 2020, the corporation tax will be dropped from 20% to 17%, so adding the dividend tax of 32.5% would give a total tax of 49.5% tax.
However, there are a few upsides to a limited company in this circumstance:
1 – Profits by 2020 will 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 so the total tax here would be £14,625. The total tax would be £17,000 corporation tax plus the £14,625 dividends tax. This is a total of 31,625.
If Sarah had all the income in her own name then the profits (assuming her total income is not more than £150,000) would be taxed at 40%.
Next steps in paying yourself tax efficiently
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