Growing your business and seeing profits increase is the aim for all businesses, especially when just starting out. However very early on you also need to consider how to remove money from your business effectively.
There are many ways that a director or shareholder can take money out of the company and deciding on the best approach can make all the difference. Speaking to your financial advisor or accountant will ensure that you select what is right for you and your business.
With that being said, here are the five most common approaches:
- Draw a salary. Depending on the amount drawn, this could be subject to PAYE and National Insurance deductions for the director and NIC contributions for the company.
- Take dividends. As of April 6th 2018, the first £2,000 of dividend payments are tax free. After this, dividends are taxed at 7.5% basic rate, 32.5% higher rate or 38.1% additional rate depending on the amount of dividend taken.
- Receive payment of interest on any funds you may have loaned to the company.
- Take use of company assets, such as a company car.
- Borrow funds from the company.
From a tax point of view, each option has its own consequences. Although it is fairly straightforward on the face of it, at Moulds & Co Accountants we would always recommend speaking to a professional tax advisor to make sure that you avoid any unnecessary pitfalls.
As above, here is the related tax information:
- Draw a salary. The standard approach here is for directors to take a low salary which, for 2018-2019 is just slightly above £8,000 a year. The reason for this is that the amount still triggers your National Insurance Contributions (enabling you to qualify for your state pension) but minimises the amount payable towards National Insurance. If you elect to draw a higher salary than this then you will be subject to higher employers and employees NIC charges.
- Take dividends. As mentioned above, the first £2,000 dividends are free whereas any dividends taken above this level will be taxed at the aforementioned basic, higher or additional rates.
- If a director has loaned significant amounts to the company, they can be paid interest on the loan by the company. This amount received will be tax free provided that it is below the Personal Savings Allowance of £1,000. It should be noted that this amount is reduced to £500 for higher rate taxpayers.
- Using company assets creates a benefit in kind charge for the director alongside an additional NIC charge for the company.
- Borrowing funds from the company is perhaps the least effective strategy from a tax point of view. Additional tax charges can arise on borrowed funds which both the company and the director will be vulnerable to.