Posted by Simon Misiewicz on 13th May 2014
Would you like an injection of tax-free money from your limited company?
Are you looking for the tax antidote?
If you have a limited company and make any profit you will be taxed at 20%. There are people who do not take money from their limited company because they are concerned about paying National Insurance.
If I were to tell you that you could take circa £40K out of your limited company “tax free” would you be interested?
Not only can you take money out of your limited company but you can also reduce the profits of the company by paying yourself a wage and thereby you will pay even less corporation tax.
This article is based on the 2014-15 tax year.
HMRC have recently increased the personal allowance in their 2013-14 budget to £10,000 per year. This means that you can take this amount of money out of the limited company tax free. If you did this, you would also reduce the profits of the company by the same amount and save £2,000 in tax.
For more information on personal allowances see point (1) in the references.
You can earn up to £41,865 before you pay a higher rate of tax. Therefore you could take £10,000 in wages from the company and take the remaining £31,865 in dividends.
Peter owns a company that makes £50,000 profit but did not take any money from the company as wages. He pays 20% in profit and therefore has a tax bill of £10,000.
Sally, a wise owl, also has a profit of £50,000 but takes £10,000 out as wages. She has no other income and therefore has this tax-free. Her business profits are therefore reduced to £40,000 (£50,000 less her £10,000 wages). Her tax bill is therefore £8,000 being £2,000 less than Peter who used the wrong accountants, obviously!
You will pay some national insurance but these are additional costs to the company that reduces the 20% tax bill.
Applying the treatment
Now we have identified the treatment here are a few ways that you can apply it to your tax pains.
Always take the maximum mount of money out of the company if it has profits. Let me take you through an example.
Dave’s business makes £100,000 profit. He takes £10,000 out as wages but does not take out dividends. Dave takes £10,000 tax free and the company pays £18,000 in corporation tax (20% of £90,000).
Dave only needs £10,000 to live on and is therefore happy.
In the second year Dave needs £50,000 in cash for a property investment. He needs to the £10,000 wages to live on and therefore decides to take £50,000 out as dividends as the company makes another £1000,000.
The tax situation is:
£0 (personal allowances as wages)
£0 (dividends up to the basic allowance of £31,866)
£5,893 (42.5% tax less 10% tax credit of the remaining £18,135)
If Dave took out £10,000 wages plus the £31,866 he would have amassed a personal income of £83,730. He obviously needs the £10,000 per year to live on, so this brings his reserves down by £20,000 to £63,730.
Dave could now invest the £50,000 tax free into his next investment saving £5,893 by taking the maximum amount of the business. Ultimately Dave could loan back the money to the limited company if he wanted to. That way the company now owes him money ready for the rainy day of the next property deal.
For more information on tax tables please see point (2) in the references.
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