Getting the rewards from a small business that is doing well is quite the norm. While it is critical that money stays in business for growth and smooth running, you also have to pull out cash as personal income to take care of present and future needs.
You can pay yourself from your business via many methods. It can be in the form of salary, dividends, bonus, private investment, pension contribution and director’s loan. Bear in mind that some of these options will reduce your tax liabilities and others offer long-term income. It becomes imperative that before you decide, you should understand the timing and tax implications.
This post will tell you more about these options, plus the most recent information on tax allowances and rates. But the truth is, these issues are non-trivial, which is why we advise you to seek the help of a professional. They will work with you to achieve the right solution peculiar to your business and personal conditions.
Salary
This is the most common form of taking out cash as your income. For the purpose of tax, consider yourself an employee of your organisation when you extract salary. Your tax will be paid from your salary, and you’ll make National Insurance Contributions to HMRC following the PAYE regulation.
PAYE: PAYE stands for Pay As You Earn and is the system used by the tax office (HMRC) to tax people who are employed, or receiving other income such as a pension. PAYE tax is collected by your employer and sent to the tax office every week or month. The amount of PAYE tax you pay is worked out by the tax code you are given. Paying tax through Pay as you Earn means any income tax is deducted straight from your wages or other income before you are paid
The best way to pay yourself a salary is to take a minimum amount less than the tax-free allowance for the current year; this is £12,570. This implies you won’t pay any income tax on this amount. If you increase your salary to between £12,570 and £50,000, your income tax rate will be 20%. The rate becomes 40% for a salary between £50,001 and £150,000. For a salary above £150,001, the rate is 45%.
For earnings above £9,500 annually, you’ll make National Insurance (NI) Contributions. If you adopt the figure as salary withdrawal limits, you won’t pay tax and NI contributions; however, you will be eligible for a State pension. A tax advisor can tell you more.
Bonus
Let’s say you decide against a regular salary; you can go for a one-off bonus. This can take the form of vouchers or cash. You will pay income tax and NI contributions at the same rates as salaries on any cash bonus. But should you extract a bonus in kind like a company car, you might pay another tax rate.
Dividend
As your company shareholder, you are entitled to the dividend on any profits made by the company. Business-wise, you must decide what part of the profit stays in business and what portion goes out as dividends. This decision must be made and recorded at a board meeting before issuing any dividends.
There can be zero tax on dividends, and you can get about £2,000 worth of dividends yearly with no accrued income tax. Anything exceeding £2,001 will attract a tax based on the PAYE bands. Keep in mind that dividend income is summed up with whatever income tax you have, and the total may push your tax into a higher tax level.
You can save on NI contributions as dividend payment is exempted from the contribution.
Pension contribution
Instead of receiving a salary, your pension fund can get contributions from your company while you save more on NI contributions and tax. But until you get to the age of retirement, you can’t touch the funds. This may not work well if what you need is immediate personal income.
People earning about £150,000 or £240,000 are allowed a yearly pension allowance contribution of £40,000. The annual allowance reduces when earnings exceed the higher limit. The maximum contribution of £40,000 mustn’t go above your total income from every source. This means that if your income is £39,000 and you get a pension contribution of £40,000, the excess of £1,000 attracts a tax.
Your company’s corporation tax liability becomes low from contributing to your pension fund. This is because the contributions are considered a business expense.
Director’s loan
If you require funds for an immediate personal need, you can fund your personal account from the company’s using a director’s loan. This is an effective source of a fund with zero interest.
But the loan is considered as an income type, and you may pay tax on it if it exceeds £10,000, or you paid your company interest on the loan below the HMRC established standard rate.
Before the financial year comes to an end, you should plan to repay the loan to your company. Failure to do this will attract an extra tax fee described as S455 on any outstanding balance.
Now, you must want to know what is S455, so basically it is a corporation tax which is levied when a Director of a company borrows money from the business and he/she is unable to return the amount within a certain time period.
If a company’s director withdraws a certain amount from the business as a loan, as per the rule, the business will not have to pay any additional tax on it if the entire amount which was taken, is paid back within nine months post the completion of the company’s tax year. S455 corporation tax is charged at 32.5% on the loan amount or outstanding loan.
Private Investment
When you use your business profit for investment in a different private company, you get an indirect source of income tied to some tax benefits. Should you invest the money in a budding or start-up business, you can receive dividends as personal income from the second business. The dividend will be taxable following the usual standard.
But, it comes down to what kind of business you invest in. This is because you or your business may qualify for tax credits via the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS).
The Seed Enterprise Investment Scheme (SEIS) offers great tax efficient benefits to investors in return for investment in small and early stage startup businesses in the UK. SEIS was designed to boost economic growth in the UK by promoting new enterprise and entrepreneurship. Now the Seed Enterprise Investment Scheme has become one of the most revered government-backed schemes ever created.
Listen to the experts
Extracting cash from your business as personal income is a decision that is complex and may take time. You must make the best decision on this, and you need help. So, get in touch with The Accountants London. We have so much experience helping businesses maximise income in the most tax-efficient ways.
Now that you have seen how your company tax is affected when you pull out money from your business for individual purposes, you must be smart about it. You wouldn’t want to run your company down, especially if it’s just starting to grow.
Feel free to contact us for helpful advice on companies income and tax issues. Would you like an accountancy quote? We can send it to you online within a minute. Call us now.
