Since the tax rates on dividends increased in 2016, owners of limited companies have had to rethink how they extract profit as income. We look at the most common and the benefits of each.
The most common use of payroll for directors is to take a minimum salary. As tax rates dictate, any pay up to £12,500 is income tax-free. Anything above this will attract income tax at 20% and eventually 40%. Salaries also attract an extra 13.8% for employers national insurance.
Maintaining a salary above the threshold to qualify for state pension whilst remaining below the personal allowance limit of £12,500 to avoid paying unnecessary income tax.
A salary such as this is a deduction in your limited company’s profit calculation saving Corporation Tax at 19% whilst at the same time making good use of your personal tax-free allowance.
Bonuses and benefits
Cash bonuses and other types of benefits such as private medical care will attract national insurance and PAYE just like a salary.
A common query we often receive is about company cars. Previously these have been popular, however with the tax on company cars increasing even for low emission and electric cars drivers are looking elsewhere.
It is important to make use of expenses incurred personally which relate to the trade of the company. For example, maximising your mileage allowance claim for use of your vehicle for work purposes.
Dividends must not exceed the amount of distributable reserves (total profit over time). Each shareholder can receive £2,000 per tax year before paying any income tax on dividends earned.
The tax rates of dividends are 7.5%, 32.5%, and 38.1%.
Dividends do not attract national insurance, have lower rates than salary and can be adjusted to suit the needs of the shareholder.
If retirement planning is appealing, you could receive immediate benefits from making pension contributions.
Any pension contribution made by your company is a tax deduction in the company’s profit calculation saving Corporation Tax at 19%. The contribution is not classed as a benefit meaning there is no tax consequence in the hands of the individual.
An annual allowance of £40,000 restricts the amount of contributions available, this is reduced more if an individual has income exceeding £150,000. However, the £40k allowance can be backdated for 3 years if it has not been used.
The government is encouraging the creation of startups in the UK. One way to do this is to provide tax incentives for investors to invest their money in companies who have EIS and SEIS status.
It provides a tax credit to the individual for the value of 30% or 50% depending on the scheme.
For more information on SEIS and EIS click here.
The above are just some of the main paths to extract profit whilst reducing your tax bill. For more information, get in touch with our team or get an instant quote.