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Tax-efficient ways of withdrawing money from your business
This leaves you with four main ways you can take money out of the company:
1. Director’s salary
3. Director Loan Account
4. Pension contributions directly from your LTD
The good news is that it can be extremely tax efficient if you combine these four methods, as you could pay corporation tax at 20% vs 40% income tax on your earnings over £ £34,501 (threshold for 2018/19), minimising therefore your personal tax liability. The bad news is that if not properly planned and monitored it can cost tax, not save it.
How does each one work?
1. Director’s salary
As a director, you are an employee of the business, so you must register with HMRC for PAYE and will also have to pay National Insurance Contributions on your earnings. This means that there are legal obligations in making returns to HMRC when running a payroll.
You have the option to take money out of your company in a tax efficient and legal way you by paying yourself a salary up to the National Insurance Contributions threshold of £ 8,424. This level of salary will also ensure you qualify for the state pension and benefit entitlements.
In addition to this, if you have sufficient profits you can take out a dividend.
Dividends are paid per share, so all shares of the same type get the same dividend and shareholders are therefore paid in proportion to the number of shares they own. Your company does not need to pay tax on dividend payments, but shareholders may have to pay Income Tax if you receive more than £2,000 of dividend in any tax year, as all tax payers are entitled to a £2,000 nil rate band regardless of the level of the amount of income an individual has.
To make a legitimate dividend declaration, the company must record the decision via board meeting minutes and must provide each shareholder with a dividend voucher (paper, or electronic). This is something that your account manager can help with.
Any remuneration that hasn’t followed the PAYE or dividend process is automatically should automatically be recorded in the Director’s Loan Account.
If you are contributing into a pension and you are an owner manager, you could also benefit from the fact that employers and employees don’t have to pay National Insurance on pension contributions. The National Insurance rate for 2018/19 is 13.8% for employers and 12% for employees (for earnings between £8,424 and £46,3650), so by contributing directly into your pension rather than paying the equivalent in salary, you save up to 13.8% on employer’s rate and up to 12% employees rate.
However, this will have an impact on the dividend available to you as the profit available after the pension contributions deductions will be much smaller.
3. Director Loan Account (DLA)
Any transaction between you as a director and the company should be recorded in a director loan account. For instance, if you incur a business expense but you pay from your personal bank account and not the business bank account then the company will owe you the money back for that expense. This however can be considered as a loan and in fact we strongly recommend you don’t get into a position where you owe the company, unless is part of a properly defined short-term strategy as this could lead to extra taxation on both the company and the individual and can be a difficult spiral to get out of.
Ok, so “what do I do in this case?”. Our recommendation- and our only recommendation – is that this can be complex and differ depending on personal circumstances and needs, so please talk to your professional adviser and keep a hawkish eye on your numbers.
4. Pension contributions directly from your Limited Company
Your company can contribute pre – taxed income to your pension. Employer contributions into pensions count as an allowable business expense, which means your company can deduct, say for a £100 contribution up to £19 allowable business expense.
The watch out here is that the contributions should be “wholly and exclusively “for the purposes of business. To figure out whether this is the case, HMRC look for certain evidence, for example whether the level of the total remuneration package i.e. salary, bonuses, commission, benefits in kind and pension contributions is commercially reasonable for the work done. Please consult your Account Manager for further information.
In addition to saving corporation tax, you could also benefit from the fact that employers don’t have to pay National Insurance on pension contributions. The Employers National Insurance rate for 2018/19 is 13.8%, so by contributing directly into your pension rather than paying the equivalent in salary, you save up to 13.8%.
This means that in total, your company can save up to 33.8% by paying money directly into your pension rather than paying money in the form of a salary. Depending on your circumstances, this may or may not be more beneficial to you than paying personal pension contributions.