How do I get paid from my company?
Deciding how to pay yourself from your company requires a little bit of financial planning from a tax point of view. You are looking to keep to minimum the amount of tax you pay, but also do it in a way that is compliant. Finding the right mix of the payments that you take requires a bit of understanding about you and your company.
What salary should I take from my company?
You need to understand what money you want to take and what you can afford to take from your company. This invariably means looking at the salary and dividends mix that you take and trying to optimise that mix.
This normally means making small national insurance contributions to secure your pensions rights and taking the remainder in dividend payments.
As a company director you are not subject to the rules regarding the national minimum wage, you are free to pay yourself as much or as little as you wish. You can take a large salary or nothing at all, the choice is really what is most tax efficient for you.
Normally as a company director you will be taking a salary just above the national insurance threshold to make sure that you just pay a small amount of national insurance and enough to secure your pension contributions and state pension rights. This amount currently is about £797 per month, so setting a salary of £800 per month would ensure that you are making a small amount of national insurance and securing the pension rights.
What dividends do I take from my company?
Dividends in the past few years have seen quite a dramatic increase in tax on them. For a long time the dividends from a company were tax free so long as they were in the 20% tax band. But for the tax year 2016/17 this was changed and a new 7.5% tax on the dividends was introduced.
Whilst not much, this has meant for business owners of limited companies that pay themselves by salary and dividends they are now facing a tax bill of about £2300 each year if they are taking wages and dividends up to the top of the 20% tax band.
This is now going to be increased again with the tax rate now increasing to 8.75% on the dividends paid during a tax year to the directors and owners of limited companies. It is now important to be able to have a plan for the dividend income that you will be taking from a limited company and to make sure that you are ready for paying tax when it is due.
What expenses can I take?
As a company director you may be entitled to take payment of expenses through your business. These expenses may be for the use of home expenses if you run your business from home, travel expenses if you are travelling for work or any expenses that you pay on your company’s behalf.
The expenses that you pay to yourself whilst not forming part of the taxable income that you pay tax on it is a part of the money that you can take from your company. It is essential that you make sure that you keep this up to date and you pay this to yourself.
What is a Directors Loan?
Linked to the expenses that you can take is a directors loan account. A directors loan account is the record of the directors financial transactions with the company, this means if you pay for expenses on the company’s behalf or if the company pays for expenses on your behalf these transactions are recorded here.
At any time you may owe the company money or the company could owe you money. Ideally there will be a point that you will need to settle this account, by either getting paid or paying the company money to clear this account.
If you owe the company more that £10,000 the loan must be reported as a benefit in kind and class 1a national insurance is to be paid on this amount and it must be declared on the p11d form that you submit each year.
If the directors loan account that you owe the company is not paid off within 9 months of the company year end you will need to pay corporation tax on the amount that is outstanding.. Corporation tax will be charged at 32.5% of the loan amount if it was made after April 6th 2016 or 25% if it was before.
This corporation tax can be reclaimed when the loan is repaid.
Any amount that you are owed by the company will be carried forward until it is repaid and will be paid to you without any tax implications.
What is the best mix?
The best mix is normally taking the salary equal to the national insurance threshold and taking any remaining amount in dividends either up to the 20% tax band limit or beyond that amount. Caution needs to be exercised when taking the above to understand that the tax rates will be taxed at 32.5% up to income limits of £150,000 per year and then 38.1% after that amount.
When you are deciding on the mix for payments from your company it is essential that you get advice from your accountant and if you need any further help please do not hesitate to reach out to Pisces to discuss how we can help you decide.