If you are an owner director of a company there are various ways to extract money from a limited company efficiently. Sensible planning of how you are going to take out money and a little tax planning is essential to find the best mix for you.
The following are the four main ways to take out money from your business.
Assuming you have no other source of income it is sensible for the company to pay an owner director a salary. If the director has an employment contract with the company, the national minimum wage (NMW) should be paid. However, if there is no contract in place the owner director may prefer to receive a smaller salary up to the NI threshold or to include all his/her personal allowance. For the year 2012/13 £624 can be paid per month before NI kicks in.
The advantage of paying a salary is that it uses personal tax allowances so potentially no tax payable by the owner director and is fully deductible for corporation tax.
These are expenses incurred wholly and exclusively for the business, such as mileage to see clients, purchasing of business essentials such as postage, stationary etc. These are sometimes small amounts and get neglected in the busy day to day running of a business, however, over a few years these really mount up. It is therefore essential to keep a track of these expenses and for the owner director to regularly submit an expense form to the company for reimbursement.
Stefan regularly goes to see his clients in his own car. The mileage cost adds up to £100 per month. Over 5 years this adds up to:
- £6,000 of expenses that Stefan could have claimed from the company tax free.
- At 20% corporation tax, is £1,200 of corporation tax that could be saved.
Dividends can be paid to owner directors in proportion to the shares that they have of the company. Dividends can only be awarded if the company is in profit. When deciding upon dividend levels the following should be considered and actioned:
- An amount should be kept in reserves for corporation tax payments.
- The owner director may wish to only pay dividends up to the higher rate limit, to prevent any personal tax being incurred.
- Dividend vouchers and board minutes should be produced.
- If cash isn’t available to pay the dividend immediately the dividend can be posted into the director’s loan account.
At different times of a company’s lifecycle the director may have loaned money to the business, or a director’s loan may have been created when valuing a sole trader / partnership business and incorporating it. This loan is repayable to the director and can be repaid to the director without any personal tax consequences.
If the company does not owe any money to a director, the company may still loan money to the director, perhaps in advance to a future dividend payment or a possible short term loan. If this happens various things need to be considered:
- Loans should be repaid to the company within 9 months of the yearend to ensure that an additional corporation tax payment of 25% will have to be paid. The loan can be repaid in various ways e.g. by paying back with cash, awarding a dividend, awarding a bonus, repayment of expenses.
- If the loan is more than £5,000 the director may consider paying interest on the loan to prevent a benefit in kind tax being incurred.
Working out the best mix to extract funds can be a bit of a juggling act. It is a good idea to take time each year or even each quarter with your accountant or finance director to review the best mix.
We offer a free initial consultation to all prospective clients and the majority of our current clients are on fixed fees, within which tax planning sessions are included at no additional cost.