Our first tip top tax tip for business owners is a really simple one and it’s one that a lot of people will be doing already…..but not everyone will doing correctly. In our video, Jon explains the most tax-efficient way to take money out of your business.
The first tip is to make sure you take the money out of your business in a tax efficient way as possible.
These tips are mainly aimed at owners of limited companies. And, if you are the owner of a limited company, the way you do this is by paying yourself a small tax-efficient salary and taking the rest of your money as dividends.
What salary do I pay myself?
What do I mean by a small, tax-efficient salary? Well, you should pay yourself a salary up to the National Insurance threshold. Currently, that’s £9,500.
Now if you pay yourself up to this threshold, the company will save corporation tax at 19% of the £9,500 but you receive it into your pocket tax free and national insurance free.
And that’s the key here. It’s National Insurance free. If you go above the threshold, your company still gets to save 19% of Corporation Tax but you personally pay National Insurance at 12% and the company pays National Insurance at 13.8%.
Therefore, you’re saving 19% in Corporation Tax, but paying 25.8% in National Insurance……which just doesn’t work.
If you pay up to the threshold, the company does pay a small amount of Employers NI as the threshold for that is a bit lower, but the net saving is just over £1,700.
And don’t worry – you do still get all your contribution towards your state pension. If you earn more than the lower earnings limit, which is just over six thousand pounds per year, you get all of the benefits….but without paying National Insurance.
How do dividends work ?
Any additional money you take out after your salary, you take out as dividends.
Dividends have to be taken after accounting for corporation tax. So you can only take dividends up to the level of the profits in your company after tax.
Dividends are a tax efficient way of taking your money out of the business. You get your first £2,000 of dividends tax free every year.
As a basic rate tax payer, you pay tax at 7.5% on dividends.
This rises to 32,5% if you’re a higher rate tax payer, ie you earn more than £50,000, and 38.1% if you’re an additional rate tax payer earning over £150,000.
Overall, though, dividends are usually cheaper than salary in tax terms.
So this is how, as a director, you take your money out the business. If you would like any more information or advice, please feel free to get in touch.