As a small business owner, one of the main benefits of having your own company is earning money from it. After all, that is probably one of the main reasons you set up your company in the first place!
To remain as profitable as possible, and to keep in the best financial position personally, there are some options open to you as a director that could enable you to maximise your take-home pay. The last thing you want is to lose huge chunks of your potential income to tax unnecessarily.
There are plenty of ways in which you can take money out of your company in a tax-efficient manner. Below we’ll look at some of these options, so you can feel much more clued up on what you could do.
As the business owner, you are also the director, and there are certain things that you need to be aware of here. A director is actually an employee of the business, which means that you need to take into consideration:
- National Insurance contributions
That means registering with HMRC and making sure that you make returns to HMRC when doing the payroll too.
You can maximise tax-efficiency by only paying yourself up to the current National Insurance contribution threshold - £8,424. You’ll still qualify for state pension at this level, but stay below the level where taxes are incurred.
In addition to a salary, you also have the option to take out dividends, as long as your profit is sufficient. The company doesn’t pay any tax on the dividend payments themselves but, as a shareholder, if you receive over £2,000 in a year, you will have to pay Income Tax on it. Keep it under that figure,however, and you are going to avoid that tax.
One thing to note with paying yourself this way is that in extreme circumstances,for example during the COVID-19 pandemic, furlough schemes do not apply to the dividends portion of your income. You will need to make alternative provision for emergencies.
Another option relies on something known as the Director Loan Account (DLA). All transactions that take place between the director and the company need to be recorded in this account. There are many situations where you might need to record something here, for example, if you paid for a business expense from your own personal bank account and then the company owes you that money. This can be considered as a loan and, if you’re not careful, you could end up paying double the amount of tax.
The best advice here is to ensure you are speaking with your accountant before you make any decisions of this kind.
You can think of profit sharing as a kind of compensation scheme that you can apply in any workplace, through which a worker can receive a portion of the profits that the company makes. This will usually be on top of the regular salary and bonuses that they might receive.
In this system, the money first goes into a pool of funds, and that then gets distributed among the employees who are part of the profit-sharing scheme. The company can decide on the thresholds and amounts for the profit sharing, so it is a very flexible way to take money out of your company.
Another way to take money out of your company is to use your pension. Essentially, you can set it up so that your company is contributing pre-taxed income to your pension, which counts as an allowable business expense. That means the company can deduct on a tax basis from those contributions.
The employer also doesn’t have to pay NI on those contributions. As you can see, there are some significant tax advantages to taking money out through pension contributions. As ever, you should speak to your accountant first.
No matter which of these methods you decide to try - or whether you are looking at doing a combination of them - you need to make sure you are always working within the law, being as tax-efficient as possible, and doing all you can to maximise your profits.
Working with a professional tax adviser makes this process much simpler, and by spending time with your accountant looking at your tax planning for each financial year,they can guide you and ensure that you are as tax efficient as possible.
To find out more about the services we provide, please call 01322 555442 for a 'no obligation' chat, or email email@example.com
Blue Rocket Accounting provides tailored accounting and bookkeeping support to businesses across Kent including Dartford, Bexley, Sidcup and Maidstone,helping to put them on course to reach their full potential.