If you are a small business owner or thinking of starting a business you may wish to read on . . .
A significant consideration for you to make is how to extract the profits you make from your company, to you, the owner of the business. Below, we have set out some tips on the best ways to do this:
The first place to start is to pay yourself a salary. An individual has an allowance of £11,500 a year tax free and subsequently Income tax is not paid on salaries up to this amount per year. Any salaries above this threshold are taxed at 20% up to earnings of £43,500, where the income tax rate increases to 40%.
There are Employee and Employer National Insurance contributions to consider, however if you employ someone in addition to yourself there is a National Insurance employment allowance, entitling you to a £3,000 deduction from your Employers National insurance over the course of the tax year.
Paying yourself a salary also means the salary is tax deductible against Corporation tax.
A common strategy is to draw a basic salary, receiving dividends additionally. Dividends can only be paid out of retained profits, and are therefore not deductible for Corporation tax. However, dividends do not attract National Insurance with lower Income tax rates on dividends than on salary:
Basic Rate 7.5%
Higher Rate 32.5%
Additional rate 38.1%
Additionally, all individuals have a £5,000 Dividend tax free allowance each year.
The Income tax on dividends is paid through your self-assessment tax return.
The contributions that are paid into a pension benefit from tax relief, whether they are paid by the individual or the company. They are not treated as income / benefit, and are not liable for Income Tax or National insurance.
Contributions can be made from your company to your own personal pension, and qualify as a tax liability for the company (i.e. they reduce your Corporation tax liability).
There are annual limits on the amount of money that can be put into pensions for individuals (covering both employee and employer contributions together).
Benefits in Kind
Benefits in kind are benefits that an employee or director receive through their employment, but not included in their salaries.
The most common types are Company Cars, private medical cover and Childcare arrangements. A number of these are tax free, including subsidised or free meals, work travel and bikes.
An alternative is to invest in another business. By investing in a new company, not only will this help them reach their initial growth targets, but certain companies qualify under EIS or SEIS schemes, meaning your investments can benefit from tax relief.
For more detail on extracting profits from your business, or to explore any of the above in more detail, please get in contact with us.