You didn’t go into business to make HMRC rich. So, here’s our guide to getting the most tax-efficient money out of your business, by PKB’s Tax Specialist, Peter Bowyer.
Pride. Productivity. Profit.
These are all great reasons for forming your own business, and PKB will support you in all of them! But we’re especially interested in how our clients can extract the most money from their business, with some careful Tax Planning.
I run a limited company. Is this blog going to help me?
Yes. If you run a Limited Company, the tax you pay will depend on how you extract money from the business. In this guide, we’ll discuss various ways to minimise the tax you’ll have to pay on your money.
Perfect. Carry on.
Thanks. Well, the first option to consider when extracting your profits is how you pay your salary.
How much salary should I take?
Paying yourself a salary of between £6,032 and £8,424 for a full year counts towards the state pension and other state benefits, but neither you nor your company have to pay any national insurance contributions (NICs).
Any salary above £8,424 would result in employer’s NICs being payable at 13.8%.
Employees’ NICs would be payable above this amount at 12% up to a limit of £46,384. Above this amount, the rate of employees’ NICs payable falls to 2%.
Your employer’s NICs liability can be set against the £3,000 employment allowance, if your company employs more than just you as the sole director and pays each of those additional employees more than £8,424.
What if I employ a family member?
Employing a family member can be a good way to spread the income from the business around the family, and use all available personal allowances and lower tax bands.
However, the wage paid to a family member must represent a market rate for the work actually performed – you shouldn’t pay your daughter a Managing Director’s salary if she’s working on reception, for example. And remember, they can’t just be a name on paper for tax purposes, they really need to work!
Aww, man. I thought I’d found a loophole.
Sorry about that. The next way you can extract your money is by using dividends.
Will dividends save me tax?
Each individual is entitled to an annual dividend allowance of £2,000.
Dividends received up to this limit are taxed at 0%, while additional dividends are subject to dividend tax according to the tax band the income falls into:
|Income tax band||Tax rate|
|Basic-rate taxpayer (up to £34,500)||7.5%|
|Higher-rate taxpayer (up to £150,000)||32.5%|
|Additional-rate taxpayer (more than £150,000)||38.1%|
These tax bands can be expanded if you make pension contributions or gift aid donations out of net income.
Can I pay dividends to family members?
Yes. Spreading dividend income among your family members can allow them to use their £2,000 dividend allowance, and pay no tax on that portion of their dividend income.
However, those family members need to first hold shares in the business which entitles them to receive the dividends. To be effective for tax-planning purposes, the shares should carry a full quota of rights, including the right to vote, receive a variable dividend and share in the capital of the business on a winding up.
How many dividends should I take?
Every tax payer has a different optimum dividend solution. The best thing is to speak with your tax accountant who knows your current personal allowance and other arrangements that can affect your current tax rate.
Can I take a salary and dividend?
Yes. A dividend/salary mix is always an option, as is no dividend and all salary, or all dividend and no salary. There are other non-tax considerations too, like future mortgage borrowing.
Is there anything stopping me from paying myself a dividend?
As long as there are positive reserves, a dividend can be paid. The board of directors decide on dividend payments so if there are multiple directors then agreement needs to be sought.
Can I give shares to my other half?
You can give away shares to your spouse or civil partner with minimal tax implications, but seek advice before doing so.
Shares given to employees can be subject to income tax as employment-related securities, but there’s a general exemption from that legislation for gifts made as part of a family relationship.
As an alternative to giving shares, family members could subscribe directly for new shares to be issued by the business.
Do I have to pay all shareholders a dividend?
You can waive the right to receive a dividend, but there has to be sufficient reserves to have paid the amount waived, even though they are not being taken.
Anything else I need to know about dividends?
The company must have sufficient reserves before the directors authorise a dividend to be paid. If there are insufficient reserves available, any dividends paid may be re-categorised as loans to the recipients.
An important thing to note is that some lenders do not consider dividend income as a factor when lending money.
Talking of loans, can I borrow cash from my limited company?
You can borrow money from your company, if this is permitted by the company’s articles and by company law.
But there are tax implications to consider.
How did I know that was coming?!
What are the tax implications?
Where the loan exceeds £10,000 at any point in the tax year, you will be taxed on deemed interest calculated at 3% of the total loan, less any interest you actually pay. The company will also pay 13.8% NICs on that net deemed interest.
A loan of any value will generate a tax charge at 32.5% on any amount still outstanding more than nine months after the end of the accounting period in which the loan was advanced.
This tax is payable by the company, but it can be reclaimed once the loan is repaid, subject to certain rules. Where the loan repayments are made out of taxed income, the loan is not treated as a continuous loan.
Be aware that loans to an employee through a third party, such as an employment trust, may be categorised as disguised remuneration and be subject to PAYE and NICs as if the loan was salary.
Can my limited company borrow money from me?
Yes. If your company owes you money, perhaps as undrawn dividends or salary, it can pay you interest on those funds at a commercial rate. Such interest is tax deductible for the company, if it uses the funds for business purposes.
You should draw up an agreement between yourself and the company to formalise the payment of interest, which sets the applicable interest rate and terms for the loan repayment.
There must be a catch, right?
Right. The company must deduct 20% tax from the regular interest payments, report and pay those deductions to HMRC on form CT61 each quarter.
Where the total interest you receive in a year is less than your saving allowance (£1,000 or £500 for higher-paid individuals), you can reclaim the tax deducted through your tax return.
If your annual income exceeds £150,000, you are not entitled to a savings allowance.
In addition to the savings allowance, there’s the starting savings rate which owner-managed businesses can take advantage of. This allows another £5,000 of interest tax-free where you earn less than £11,850 in 2018/19.
Are there any property rules I should know?
If you own a property which is used by the company for its trade, the company can pay you rent. The property can be anything from a factory to part of your own home and, in every case, the terms of the arrangement should be set out in a lease or licence agreement.
The rent paid is tax-deductible for the company, and it does not attract NICs for you or the company.
Now you’re talking! Can I do this myself?
We advise clients to always seek legal advice on land-related agreements, and be careful not to give the company exclusive use of any part of your home, as this could restrict your capital gains tax exemption relating to that property.
Do I have to declare the rent?
Yes, you need to declare the rent on your tax return alongside any relevant expenses, such as insurance or mortgage interest. The £1,000 property income allowance cannot be set against rent received from your own company.
In the long-term, receiving rent for a commercial property can restrict the availability of entrepreneurs’ relief on gains made on the eventual sale of that property.
What about pensions? Can I do anything clever there?
Where the business pays pension contributions as your employer, those payments are tax deductible for the business, so long as your total remuneration package is reasonable for the work you perform for the company.
Where the total pension contributions paid by you or on your behalf lie within your annual allowance, usually £40,000 a year, there is no tax charge when the contributions are paid.
If you’ve already taken some pension benefits, or your annual income is £150,000 or more, you may have a restricted annual allowance. As ever, we’d advise you to seek expert advice before investing in a pension scheme.
And finally, talk to me about the benefits…
As we discussed in an earlier blog, Employee Benefits can be a smart way to motivate your staff, but they do have tax implications.
You can take advantage of tax-free benefits up to the following limits:
- One mobile phone per employee
- Loans worth up to £10,000 per person (see below)
- Employer-provided training (no monetary limit)
- Non-cash gifts up to £50 per item (see below)
The non-cash gifts can be items such as wine, flowers, chocolates, vouchers or a gift card, but it must not be given as a reward for services or be in any way contractual. Vouchers and gift cards must not be exchangeable for cash.
Company directors and their family members can receive up to £300 of tax-free gifts from the company in total per tax year.
That’s me off to the shops then! Cheers!
Talk to us
If you’d like any more help with extracting your business profits and to establish the best solution for YOU and YOUR BUSINESS, talk to our expert Peter Bowyer.
To read news and blogs from Peter Bowyer, click here >>